Daily Brief – Have we forgotten the budget?

Have we forgotten the budget?

Despite a significant up-tick in realised volatility across the board, options pricing remains relatively contained. Take GBPEUR, for example. The pair has been moving significantly higher in recent sessions whilst a blow-out in Eurozone bond spreads undermines Euro-sentiment. The foundations behind that move are questionable (more below) but the sell-off remains persistent. Despite the pair having gained 1.9% in favour of the GB Pound in little over a week, implied volatility over the next month only implies a further move of less than 1.2%.

This isn’t because implied volatility reacts slowly to developing market trends: far from it. Markets pricing limited scope for further downside moves in the Euro could be in part due to the price shift that has already taken place. However, much of the argument against the Euro lies in the market’s dissatisfaction in the growing asymmetry in the Eurozone, particularly within debt issuance capacities. France has felt the squeeze of the market in recent sessions and despite robust auctions, spreads continue to be divorced from more credit-worthy Germany.

Alongside concerns over inflation, energy import costs, the size of national debt and domestic unrest, one major argument driving that supposed contrast is the upcoming French Presidential elections next year. As such, according to market commentary, GBP is being seen as a relative haven for European-exposed risk. That’s certainly the first time in a long time we’ve seen the Pound referred to with such credibility. However, not to talk down the fiscal credence of old Blighty, but perhaps markets are overlooking our own autumn budget now drawing rapidly into focus. At lofty heights against the Euro, albeit lagging well behind an advancing Dollar, the Pound could be vulnerable both to spot moves and implied volatility moves as traders begin to shift their attention towards the budget.

Discussion and Analysis by Charles Porter

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