Pound Under Pressure Ahead of UK Budget as Investors Take Out Short Positions

Investors are taking out short positions on the British pound ahead of the UK's new government's first budget, set to be unveiled in a month. Morgan Stanley has projected a year-end target of $1.30 for the pound, and its FX strategists have stated that there is 'asymmetric risk' and investors may price in additional downside risk for the pound.

Data from the Depository Trust & Clearing Corporation (DTCC) show that options betting on a decline in the pound against the U.S. dollar in the week following the October 28 budget account for two-thirds of market trading volume this month, while put options on the euro against the pound make up three-quarters of total.

Major banks, including Morgan Stanley and Bank of America, have been slashing their forecasts for the pound, with some predicting a fall to $1.30 by year-end or mid-2027. However, Goldman Sachs maintains a neutral stance, believing that the pound's upward momentum may stall around 1.35 to 1.36.

The risk-reversal indicator points to bearish bets on the pound, and market pricing has clearly tilted toward the bearish side. The UK government bonds have also experienced sharp volatility this month amid concerns about the fiscal outlook.