Traders bet against the British pound ahead of the presentation of the country's draft budget

Currency traders have increased their bets that the scheduled November 26 speech of UK Finance Minister Rachel Reeves with the budget statement in the Parliament of the country will provoke weakening of the pound sterling. Although the parameters of the country's annual budget remain a mystery, many market participants believe a significant tax increase is inevitable. This could slow down the already weak growth of one of Europe's largest economies.

Over the past week, trading volumes of put options used to speculate or hedge a fall in the pound have more than quadrupled compared to bullish call options, the Financial Times reports, citing data from CME Group, the operator of the largest derivatives trading venue. Its data also shows that puts on sterling expiring on the day of the budget presentation are significantly more expensive than calls - a sign that traders believe the more likely reaction to the tax plans of the Ministry of Finance weakening, rather than strengthening the pound, notes the FT.

The difference in the value of put and call options is at its highest since January, when traders also took positions en masse in anticipation of a weaker pound in preparation for Donald Trump's inauguration, the newspaper said.

Many investors believe that the announcement of the annual budget parameters on November 26 may trigger a further fall in the pound sterling, which is already near its lowest level since April. This will happen if the Ministry of Finance's tax and spending plans worsen the economic outlook.

The market is already concerned about excessive government borrowing, and investors doubt the ability of the Labor government to implement its economic program, states the FT.

"It's hard to see how Reeves can deliver an outcome that looks bullish for UK [economic] growth and [simultaneously] favors the pound," said RBC BlueBay Asset Management fixed income investment director Mark Dowding. If the draft budget is not to the electorate's liking, political pressure on the government could also lead to a sell-off in the currency, he warned.

For Nuveen Global Investment Strategist Laura Cooper, the key thing to watch is the trajectory of UK interest rates. In her view, the tight fiscal consolidation - tax hikes and deficit reduction - in the new budget will put serious pressure on UK economic growth, forcing the Bank of England to cut rates more aggressively than current market expectations. The expert estimates that the regulator could make three rate cuts by the middle of next year, bringing the rate to 3.25%, while the market is only laying out two rounds of easing. "It's very hard to see a catalyst for the pound to resume its rally," Cooper stated on CNBC.

This article was AI-translated and verified by a human editor