Insights 
VT 
The Pound Sterling experienced a sell-off, and Gilt yields decreased on Wednesday. This was not anticipated as a prelude to the November budget. The market’s focus is largely on the Bank of England’s actions, as the UK’s fiscal tightening may necessitate the BoE lowering interest rates sooner.
There is an expectation for UK Chancellor Rachel Reeves to adhere to her fiscal rules, possibly enhancing fiscal tightening to create budget headroom. As a result, there has been a shift in the GBP swap rates this month. The market anticipates a BoE terminal rate reduction to 3.25% by next summer.
Repricing Of The Boe Cycle
The repricing of the BoE cycle might currently be sufficient, making it risky to pursue sterling beyond 1.3140/50 in GBP/USD or above 0.8850/70 in EUR/GBP. The BoE maintaining a hawkish stance could lead to sterling recovering some losses in the upcoming MPC meeting.
We’ve seen the pound sterling sell off recently, but this seems less about a general “Sell UK” theme and more about the Bank of England’s (BoE) path. The market is anticipating that fiscal tightening from the government will force the central bank to carry the load. This means the BoE might have to lower interest rates earlier than previously thought to support the economy.
This expectation of earlier rate cuts has been aggressively priced into the market over the last month. We have seen swap rates adjust to price in a BoE terminal rate as low as 3.25% by next summer. Overnight Index Swaps now suggest a near 75% probability of the first rate cut occurring by the second quarter of 2026.
However, the latest inflation data from earlier this month, which showed CPI holding firm at 3.1%, gives the BoE reason to sound tough. This contrasts with recent GDP figures that showed a slight 0.1% contraction in the third quarter, highlighting the difficult balance the bank must strike. This tension between sticky inflation and a weak economy suggests the market may have gotten ahead of itself.
Trading Strategies For Traders
We saw a similar situation back in late 2023 when markets heavily priced in rate cuts for 2024, only for the BoE to push back with hawkish guidance. Given that history, chasing the pound lower at this stage is a dangerous game. Critical support for GBP/USD is sitting at the 1.3140/50 level, which could prove difficult to break decisively.
For derivative traders, this means opening new bearish positions on sterling looks unattractive. Instead, the risk is now skewed towards a short-term reversal, especially if the BoE maintains some of its hawkish rhetoric at next week’s meeting. The high level of bearish sentiment could fuel a sharp rebound if the central bank surprises the market.
Therefore, traders might consider strategies that benefit from a pause in the sell-off or a modest bounce. This could involve selling out-of-the-money GBP puts to collect premium, betting that the 1.3140 support will hold. Alternatively, buying short-dated, low-cost call options could offer a tactical play for a relief rally following the MPC meeting.
