A short lived short squeeze?
Sterling is undoubtedly benefitting from a short squeeze. Traders on net had increased positions that benefit from Sterling’s demise leading into the budget. Depending upon the participant’s persuasion, that could have meant gaining an outright short exposure to the currency or, in a more mild form, trimming any or all remaining positive exposure to the Pound. Ultimately, most would argue that from a market perspective the UK economy has emerged relatively unscathed from the fiscal event. This has left a vacuum for Sterling to appreciate into which it has done.
Gaining around a cent versus the Euro and more like two versus the US Dollar, the risk premium created by the budget is likely to be all but eliminated by now. So, given that Sterling is relatively expensive by longer term averages, could this short-term short-squeeze be over? The answer is yes, GBP is more than capable of moving lower once again. The catalyst for such an event may be just around the corner where the likelihood of a cut from the Bank of England on 18th December is building. As well as a pricing out of risk premium, GBP has been supported by the sheer cost of hedging against it. As rates move lower into 2026, that tailwind for Sterling will fade.
Looking ahead into the new year, 2026 is the year of supposed consolidated fiscal stimulus in Europe. The market remains cautious of any watering down of initiatives for tranches of debt repayable at the European versus national level. However, so long as all goes to plan, the Euro stands to gain immensely from such a trend. With the ECB’s cutting cycle now concluded for the foreseeable future, the Euro too will benefit from narrowing rate differentials as the remainder of the G10 normalise rates.
Discussion and Analysis by Charles Porter
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