Bank of England Deputy Governor Sarah Breeden said political uncertainty is affecting the business environment, according to a Financial Times report published on Monday. She warned that this uncertainty is having an impact on conditions for businesses.
Breeden also said the Bank of England should avoid being “trigger happy” when changing interest rates. She cautioned against making rapid or hasty adjustments to borrowing costs.
Market Pricing And Immediate Reaction
In market moves at the time of writing, West Texas Intermediate (WTI) was down 0.08% on the day at 1.3315.
It appears the Bank of England is signalling that interest rates will remain stable in the near term, as officials are hesitant to make any sudden moves. The backdrop of political uncertainty is clearly weighing on the business environment. For us, this suggests a period where the central bank will be on hold, watching how the economy absorbs these pressures.
This environment of high uncertainty but stable policy is a classic recipe for increased market volatility. We are seeing this reflected in the options market, where three-month implied volatility for the GBP/USD pair has risen to 9.5%, a significant jump from the 7% levels we saw just last month. This suggests traders should consider strategies that profit from price swings, rather than a clear directional move.
The warning against being “trigger happy” with rates has pushed back expectations for any cuts this summer. Overnight Index Swaps now price in less than a 20% chance of a rate cut by the August meeting, a stark contrast to the 50% probability we saw priced in just a few weeks ago. Therefore, trades that rely on falling short-term rates, such as being long on short-dated UK gilts, now carry significantly more risk.
Positioning And Risk Across Assets
The impact on business is already visible in the data, adding weight to the concerns over the political climate. The latest figures show that UK business investment fell by 0.5% in the first quarter of 2026, a worrying reversal after the steady growth we had observed through much of 2025. This weakness suggests a cautious stance on UK equities is warranted, and hedging with FTSE 100 put options could be a prudent move.
For the pound sterling, these two forces are pulling in opposite directions, with stable interest rates offering support while political worries create downward pressure. This conflict could keep the currency range-bound in the coming weeks, much like the pattern we remember from the run-up to the general election in late 2024. Selling options at the top and bottom of this expected range could therefore be a viable strategy.
