Traders are increasingly betting on a fall in the pound as concerns mount over Chancellor Rachel Reeves’ ability to stick to her fiscal policy following a sharp rise in borrowing costs.
According to Bloomberg, many of the so-called options trades could benefit if sterling falls to $1.12, an 8 percent decline that would mark a two-year low and exceed the volatility seen during the 2022 budget crisis.
Sterling lost 1.8 percent last week, hitting $1.222, amid growing concerns over whether the Chancellor can meet his debt and borrowing obligations. Yields on long-term government bonds have risen to their highest level since 1998, leaving the Treasury’s £10 billion treasury looking staggeringly thin. Investors fear that Reeves may be forced to raise taxes or cut public spending to keep his commitments intact.
Meanwhile, the Bank of England is now widely expected to cut interest rates only once this year, rather than twice, due to continued inflationary pressures. Jamie Niven, fund manager at Candriam, said the outlook for liquidity is bleak: “On the one hand, you have the limited cost of the Bank of England’s tapering, and the financial crisis is also very bad.”
Last week, Deutsche Bank weighed in, encouraging investors to sell the pound. Economist Shreyas Gopal warned that there is “more upside to the recent weakness in the pound,” echoing the sentiment that higher bond yields and looming fiscal pressures could put downward pressure on currencies.
The turmoil in the market caused Rachel Reeves to step down. Stephen Perkins, Managing Director at Yellow Brick Mortgages, accused him of “bringing the UK to the brink of collapse,” while Keith Budden, Managing Director at Insurety, said he “didn’t do much for business confidence.” Both suggested that a change in leadership could be the only way to restore stability and restore investor confidence.
Kundan Bhaduri, an architect at The Kushman Group, went further, calling the current administration a “Labour circus” and describing Reeves’ economic policies as “infantile.” Meanwhile, David Belle, Founder and Trader at Fink Money, said his position had become “out of control” due to “outrageous lies,” a conflicting CV, and a bond market looking for ways to boost growth.
Gabriel McKeown, Head of Macroeconomics at Sad Rabbit Investments, suggested that the government was essentially repeating the mistakes made during the mini-Budget fiasco, warning that a large increase in borrowing “without clear plans for financial stability” made the market reaction unsurprising. Riz Malik, an Independent Financial Advisor at R3 Wealth, noted that while a resignation would be best for the country, the right candidate to replace Reeves remains in doubt.
The frustration extends beyond the internal workings of the Treasury Department. Sam Kirk, Managing Director at J-Flex Rubber Products, questioned the Chancellor’s credibility, saying: “The only time ‘Rachel Reeves’ and ‘economy’ should be together is in the speech ‘Rachel Reeves economy and truth.'” Kirk and he lamented the wider political climate, suggesting that the pool of talent available in the Cabinet and across political parties was worryingly thin.
As the chorus of criticism grows, the coming weeks could be crucial in determining the direction of the economy and political stability in the UK. With bond yields near multi-decade highs, inflation, and warnings of an impending downturn, the Treasury Department must decide whether to reformulate its policies or risk destroying the country’s international credibility. Whether such a change includes a new Chancellor is not certain, but for now it seems very likely that he will be caught in a whirlwind of financial uncertainty, market anxiety, and political conflict.