GBP: Notable Two-Way GBP Risk Today; Vols Well Elevated
GBPUSD still sees notable two-way risk headed into today's Budget - despite trickling details of policy measures across the UK press this morning. This week's spot recovery works against the bearish trend theme, which would resume on a break below 1.3010, the Nov 4 / 5 low, but we also see positioning dynamics possibly creating room for a GBP squeeze, raising the risk of a short squeeze given the amount of Budget scrutiny the currency has been under this month.
The front-end of the vol curve remains well elevated in anticipation of the Budget. An overnight GBPUSD straddle breaks-even on a ~90 pip swing, close to double the running YTD average, indicating greater expectations of intraday vol across the Budget today.
Compared to previous Budgets, markets are clearly cautious of not being caught offguard with market vol as was the case in 2024 - however vol gauges are still more moderate when compared to Budget events in 2022, 2023 - and in particular the Truss-Kwarteng mini-Budget 3 years ago (see below).
We still see scope for market surprises, with key uncertainties remaining over headline changes in tax, disinflationary measures, fiscal headroom and scope for Gilt sales (see more here: https://www.mnimarkets.com/articles/five-factors-that-will-drive-the-budget-market-reaction-12-1763984878006 ).
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UK FISCAL: Reeves Re-iterates Need For Both Tax and Spending Changes
"*REEVES LOOKING AT BOTH TAX AND SPENDING TO KEEP TO FISCAL RULES" bbg
- Reeves said as much over the weekend.
Other headlines:
- "*BUDGET WILL MAKE DECISIONS ON IMPROVING PUBLIC FINANCES: REEVES" Bloomberg
- "*UK SPENDING TOO MUCH SERVICING GOVERNMENT DEBT: REEVES" Bloomberg
EURIBOR OPTIONS: More Short Cover
- ERH6 98.37/98.62cs vs 0RH6 98.37/98.62cs, bought the mid for 1 in 12k total (Short Cover).
That structure traded in around 100k back in June.
AUD: AUDUSD Moves To Fresh Session Highs On Cautious Bullock Remarks
AUDUSD moving to fresh session highs on these comments from RBA Governor Bullock, now up 0.6% on the session at 0.6552. Today’s extension higher has strengthened a bullish theme. Resistance is seen at 0.6574, the 50.0% retracement of the Sep 17 - Oct 14 bear leg.
- While non-committal around easing risks at the upcoming November 4 decision (in line with our Asia-Pac team’s expectations), Bullock was more cautious in noting that Australian rates may not come down as far as other countries.
- A reminder that overnight AUD strength was driven by increased hopes of a US/China trade deal following talks over the weekend.
""*BULLOCK: CPI 30BPS OVER FORECAST WOULD BE QUITE MATERIAL MISS" Bloomberg
- A reminder that Australia Q3 CPI is due on Wednesday. From our Global Week Ahead publication: Q3 CPI prints will be a key input into the RBA's 4 November decision. Volatile monthly CPI data for July and August are signalling that the trimmed mean may have stabilised around 2.7% rather than progressing towards the 2.5% target band mid-point. RBA Governor Bullock noted that the pick up in some components and especially core services was a concern given its stickiness in some other countries.
