Currency traders have placed their largest bets against the British pound since the 2016 Brexit referendum, with over $6.5 billion wagered on further declines as the UK approaches its budget announcement on October 28. This bearish sentiment is reflected in official figures from the US financial regulator, the Commodities and Futures Trading Commission (CFTC), which show the longest streak of 'sell' orders against sterling in a decade. The pound has already weakened, falling to $1.32 against the dollar, its lowest in almost three months and a 1% drop against the dollar this year.
Several factors are contributing to this negative outlook. The Bank of England's decision to maintain interest rates at 3.75% has made the pound less attractive to investors compared to other major currencies. Additionally, concerns about the UK's public finances are mounting, with public sector borrowing reaching $18.3 billion in August, exceeding forecasts by $3.5 billion. Total borrowing for the financial year to August stands at $77.3 billion, $8.1 billion above expectations, and the interest bill on national debt hit an August record. These figures, combined with chatter about potential tax increases in the upcoming budget, are fueling investor pessimism.
Options markets are also reflecting increased risk and bearish positioning. Implied volatility for GBP/USD surged by 47 basis points to 5.96% ahead of the budget announcement, marking the highest level since July 29, indicating heightened uncertainty. While this has since moderated, the relative premium on options suggests prices are approximately 77 basis points above realized volatility. Risk reversal indicators continue to favor the US dollar, with an 81-basis-point spread. Data from the Depository Trust & Clearing Corporation (DTCC) shows that 6% of total nominal options transactions this month are concentrated on expiring during the budget announcement week and the following week, with 67% of these positions being bearish on the pound. For the euro against the pound, approximately 9% of total nominal transactions expire in the same window, with about three-quarters being bearish on the pound.
Speculative traders significantly increased their net short position in sterling futures by 40.6% in the week leading up to September 22, reaching 82,568 contracts. This represents the largest net short position since July 7, with a notional value of about $5.16 billion. This bearish bet is primarily concentrated among asset managers, whose net short position rose to 115,805 contracts, while leveraged funds remained net long but reduced their position. This collective bearish stance is being described by some as a "disastrous vote of no confidence" in the current government's economic policies, echoing sentiments seen before the 2022 mini-budget that caused significant market turmoil.
