Sterling edges up; pre-budget jitters stoke volatility
By Ozan Ergenay
London, Nov 25 (Reuters) - Sterling headed for a fourth daily rise on Tuesday, while traders piled into the options market seeking protection against heightened volatility in light of Britain's upcoming budget announcement.
The pound, which is heading for a 4.8% gain this year, last traded at $1.3132 GBP=, up 0.24% on the day, while edging up against the euro EURGBP=, which dipped 0.1% to 87.815 pence.
Reflecting the nervousness over how sterling might react to the budget, the cost of hedging against a large overnight swing in the price has shot to its highest in months.
Overnight sterling implied options volatility GBPONO=, a measure of demand to own derivatives to protect against turbulent price action, shot to nearly 12% on Tuesday, from below 2% at the start of the week, according to LSEG data.
At one point, overnight implied vol for euro/sterling EURGBPONO= hit its highest since the market turmoil in April, after U.S. President Donald Trump's announcement of sweeping global tariffs.
Francesco Pesole, currency analyst at ING, noted that one-week implied vol for euro/sterling EURGBPSWO= was well above where realised volatility - how much a currency pair is actually moving - and that gap was at the highest since the 2022 mini-budget crisis.
"This signals that, despite some recovery in back-end gilts, the currency market remains concerned ahead of tomorrow's UK budget announcement," he said in a note to clients.
Finance Minister Rachel Reeves will announce her long-awaited budget on Wednesday and is expected to need to raise tens of billions of pounds to stay on track to meet her pre-election promises and fiscal targets.
Sophie Svestad, communications manager at Ninety One, said Reeves faced a difficult balancing act, by attempting to deliver a budget that simultaneously pleased Labour backbenchers, the electorate and the gilt market.
"To try to achieve this we are likely to see an end to the two-child benefit cap and little in the way of new spending cuts," Svestad added.
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