Last week, the Pound Sterling (GBP) performed steadily, with some ups and downs, but stayed within a small trading range. The EUR/GBP pair ended slightly lower, reflecting trends observed throughout the year. Despite various news items, including comments from Bank of England officials and the finance minister, the GBP did not take a new direction. British finance minister Rachel Reeves mentioned plans to increase the fiscal buffer in the next budget. The current buffer is declining, raising concerns about whether it will be enough to handle economic shocks. While a larger buffer is usually good news, it might lead to tax hikes in the future. Balancing the budget remains tough due to limited revenue and rising spending needs.

Monetary Policy Evolution

Monetary policy has become a hot topic again. The central bank has been cutting interest rates every three months, amid volatile votes and uncertainty among policymakers. The chances of another rate cut in early November are getting slimmer. Still, future inflation, growth, and the November budget will continue to impact these discussions. In the coming weeks, we expect more uncertainty due to budget issues, which could affect the GBP, making this a critical time for the currency. For most of this year, the Pound has been stable, trading within a narrow range despite ongoing news. One-month implied volatility on GBP/USD has stayed low at around 6.5%, a big drop from the over 20% spikes we experienced in past stressful times. This calm seems to be ending as we approach the year’s end. The key event is the upcoming budget in late November, where the government plans to increase its fiscal buffer. With UK debt-to-GDP holding at around 99%, reaching this goal will require tough choices, creating uncertainty for the currency. Just remember the turmoil in the market after the 2022 “mini-budget” to see how sensitive the Pound is to unexpected fiscal changes.

Bank of England’s Uncertain Path

Simultaneously, the Bank of England faces an unclear path after cutting interest rates each quarter this year. With inflation still above the target at 2.8% and quarterly growth struggling at just 0.2%, the Bank is in a tricky situation. The upcoming budget will significantly affect its next move, adding more unpredictability. As uncertainty rises, recent stability isn’t a reliable guide for what’s next. The low implied volatility in the options market gives traders a chance. This situation suggests that buying volatility through tools like straddles or strangles on GBP pairs could be a smart move. These strategies could benefit from a significant price move in either direction, which seems likely. We should consider options that expire after the late November budget announcement to capture the full effect of the event. The market is expecting a quiet period, but we anticipate significant changes in the coming weeks. Create your live VT Markets account and start trading now.

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