Pound Volatility Soars as Traders Hedge for UK Budget Turbulence

The cost of protection against swings in sterling has surged to a seven-month high before Wednesday’s UK budget.

Overnight volatility versus the euro jumped to the highest since mid-April on an intraday basis, and is at the strongest closing level since June 2023 as traders load up against near-term price gyrations. Options now trade at the widest premium to realized swings in three years, signaling hedges are way overpriced relative to what the market has recently delivered.

UK risk is being routed mostly through the euro, sidestepping the US macro influence on pound-dollar. Still, positioning has leaned pound-bearish this month versus both the common currency and the greenback, according to data from the Depository Trust & Clearing Corporation.

Even though traders are taking no chances into the Autumn Budget, they’re not positioning for an outsized move. Demand for structures that pay out if the UK currency bursts out of its recent ranges versus the dollar fell Monday to the lowest since June, while staying near the year-to-date average versus the euro.

That partly reflects historical patterns, as — apart from the mini-budget in September 2022 — budget days have rarely been major volatility events. Since 2017, the pound’s typical move on the day has been roughly 0.5% against the dollar, and overnight cable volatility is broadly in line with that average.