Sterling rallied for the fourth straight day on Tuesday, as traders flocked to the options market seeking protection from potential volatility ahead of Britain’s budget announcement. The currency, which has gained 4.8% in value this year, was last trading at $1.3132, up 0.24% on the day. It also climbed against the euro, which slipped by 0.1% to 87.815 pence.
The growing apprehension over sterling’s reaction to the budget announcement has driven hedging costs to their highest in months. According to LSEG data, overnight sterling implied options volatility surged to nearly 12% on Tuesday, from below 2% at the week’s start, reflecting a heightened demand for derivatives to manage turbulent price movements.
In the euro/sterling market, overnight implied volatility reached levels not seen since April’s market upheaval triggered by former U.S. President Donald Trump’s global tariffs announcement. ING currency analyst Francesco Pesole pointed out that one-week implied volatility for euro/sterling exceeded realised volatility, marking the largest gap since the 2022 mini-budget crisis. This suggests ongoing market jitters ahead of Finance Minister Rachel Reeves’ budget reveal on Wednesday, where she is anticipated to address fiscal challenges without aggressive spending cuts.
(With inputs from agencies.)
