Insights 
VT 
Last week, the Pound Sterling (GBP) displayed consistent performance with volatile movements but remained within a narrow trading range. The EUR/GBP pair ended slightly lower, mirroring trends seen over the year. Despite a surge of news, including statements by Bank of England officials and the finance minister, the GBP did not establish a new trajectory.
British finance minister Rachel Reeves noted the likelihood of increasing the fiscal buffer in the upcoming budget. This buffer has been diminishing, raising concerns about its sufficiency to handle economic shocks. While a larger buffer is generally positive, it could lead to future tax increases. Achieving a balanced budget remains challenging given revenue constraints and spending pressures.
Monetary Policy Evolution
Monetary policy has regained attention, with the central bank reducing interest rates every three months amidst volatile votes and growing policymaker uncertainty. The possibility of another rate cut in early November is diminishing. Nevertheless, future inflation, growth, and the November budget will influence monetary policy discussions again. Over the coming weeks, heightened uncertainty is expected due to budget challenges, with potential impacts on the GBP, making it a crucial period for the currency.
For most of this year, the Pound has been quiet, trading within a tight range despite a steady stream of news. One-month implied volatility on GBP/USD has been hovering near a low of 6.5%, a stark contrast to the spikes above 20% we saw during previous periods of stress. This period of calm now appears to be ending as we head towards the end of the year.
The main event is the upcoming budget in late November, where the government aims to increase its fiscal buffer. With UK debt-to-GDP remaining stubbornly high at around 99%, achieving this will require tough choices that create uncertainty for the currency. We only have to look back to the market turmoil following the 2022 “mini-budget” to remember how sensitive the Pound is to fiscal policy surprises.
Bank of Englands Uncertain Path
At the same time, the Bank of England’s path is unclear after cutting interest rates every quarter this year. With inflation still above target at 2.8% but quarterly growth sputtering at just 0.2%, the Bank is in a difficult position. The upcoming budget will heavily influence its next move, adding another layer of unpredictability for us to navigate.
Given the expected rise in uncertainty, the past few months of stability are not a reliable guide for what is to come. The current low implied volatility in the options market presents an opportunity for traders. This environment suggests that buying volatility through instruments like straddles or strangles on GBP pairs could be a prudent strategy.
These positions would profit from a large price move in either direction, which seems increasingly likely. We should be looking at options that expire after the late November budget announcement to capture the full potential impact of the event. The market is pricing in a quiet period, but we expect that to change significantly in the coming weeks.
