Pound Bears Choose Euro Over Dollar as UK Budget Risk Looms

Options traders are betting that tax-and-spend budget moves will send the pound lower against both the dollar and the euro.

The common currency is the best vehicle to concentrate UK-specific risks, as shown by the two-week rollover in options on Wednesday. The dollar side is more complicated, with the US government re-opening and fresh data risks making it hard to isolate the ahead of the budget on Nov. 26.

Euro-pound rose to its strongest since April 2023, a move mirrored and amplified in options flows. Nearly 85% of trades through the Depository Trust & Clearing Corporation favored euro-bullish structures, while the richest premiums targeted an advance of 1.5% to 0.8950 in two months.

So-called risk reversals show that traders are the most bullish on the euro in four months, despite the fresh highs in the spot market, while hedging costs have climbed to their highest since early July.

While sterling’s direction is similar across the euro and the greenback, the magnitude isn’t. Pound-dollar volatility is only back to September highs, roughly two out of three options traded yesterday leaned dollar-positive, and sentiment suggests fatigue in chasing sterling lower versus the dollar.

Pound hedging costs saw the biggest jump since President Donald Trump’s “Liberation Day” in April versus both the euro and the dollar, a clear signal that the UK budget is a key risk event for traders. For directional trades, the euro looks the cleaner vehicle.