Global FX: GBP FX - UK Budget Preview
The desk sees the upcoming UK Budget as a pivotal moment for GBP FX, with potential volatility expected due to market positioning and sentiment. Per the full note from J.P. Morgan, the outlook suggests that the government’s fiscal plans could either bolster or undermine the gains recently made by the GBP, depending on the specifics revealed in the statement. Given the importance of this event on October 26, traders should keep an eye on the strategic messages from the Chancellor, especially surrounding spending and tax policies that may impact monetary policy outlooks. After recent performances in the context of broader economic conditions and BoE policy adjustments, the GBP is sensitive to shifts in fiscal narratives as it approaches a critical inflection point.
What the desk is arguing
The desk predicts that the UK Budget will generate notable implications for GBP FX positioning and sentiment, potentially leading to increased volatility. Per the full note from J.P. Morgan, the reactions will hinge on whether the fiscal strategies will support or undermine the current trend seen in the sterling, particularly as traders adjust their positions before the announcement.
The backing behind this viewpoint lies in recent market data, which show GBP trends reflecting broader economic conditions, including inflation figures and the outlook for interest rates. Currently, market participants are increasingly factoring in a cautious approach from the BoE, hinting at possible implications for this week’s announcement. This could heighten volatility in the FX market as positioning adjusts accordingly.
Where it sits in our coverage
firmId jpmorgan sees a target for GBP/USD at 1.10 for March 2026, aligning with a bullish outlook based on recent economic signals. Conversely, firmId bofa is forecasting a more cautious target of 1.04 for the same period, reflecting a divergent view on UK fiscal prospects and their impact on monetary policy. The current position from J.P. Morgan is at the upper end of expectations, emphasizing the potential for an upward move should the Budget exceed market anticipations.
How other firms see it
Firms like jpmorgan are aligned on a bullish stance for GBP, while bofa stands in opposition with bearish outlooks regarding GBP's immediate trajectory. It's clear that there is a split sentiment on how fiscal announcements will impact GBP performance following the announcement.
Related considerations may include the EUR/USD trajectory, especially how the European Central Bank's monetary policy decisions could interact with the UK Budget’s implications. Traders should also be attuned to the overall sentiment towards GBP amid these fiscal discussions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK Budget to be a pivotal moment for GBP FX
- 02Market positioned for potential volatility
- 03Expectations diverging among major firms
- 04Fiscal decisions may influence BoE outlook
Market implications
Traders should look for GBP/USD movements towards 1.10 or below as strategic levels post-Budget announcement. Additionally, positioning shifts leading up to October 26 may signal trader sentiment ahead of the announcement.
Risks to this view
A failure by the government to explicitly detail supportive fiscal measures could lead to a rapid depreciation in GBP, potentially invalidating the current bullish stance. Additionally, adverse economic data releases prior to the event could further sway market perceptions.
Hello, welcome to this week's At Any Rate podcast. My name is Pat Locke, FX Strategy based out of New York. With me today, James Nelligan out of London to talk about one of the more highly anticipated macro risk events this year, the UK budget, which headlines what looks like a pretty loaded event risk week next week across the DM space.
James, you've had a pretty good call on sterling this year, you know, fading the spike in risk premium and euro sterling early on in Barnum's premiership campaign. And lo and behold, sterling has proven to be the third best performing currency so far this year in G10 as a result. But now you could say the moment of truth has arrived with the budget, you know, due to be announced next week on the 28th.
And so having faded sterling's fiscal risk premium earlier this year, how are you now seeing the risks around the budget release itself for sterling next week? Thanks, Patrick. Yeah, you know, I think communication around this throughout the year has been, you know, the new leadership looking for a kind of fiscally neutral budget, recognizing the fiscal constraints and, you know, talking about sticking to the fiscal rules.
I think that's something the market's very comfortable with. And in terms of our expectations, we've kind of narrowed down on a buildup of around 15 billion of headroom, which we get to via around kind of 5 billion of tax raise measures. There's been some guidance around what the makeup around that would be in terms of potential bank tax where the surcharge be raised from 3 percent to 8 percent might raise as much as 2 billion a year.
And I think, you know, that kind of base case for sterling, if you're getting 15 billion headroom, the tax measures are reasonably close to what's being discussed, then, you know, you can you could look for some rally on sterling on the day. You know, we've said around around half a percent. Maybe that's a bit much considering the news itself, because I think the market has centered on that kind of outcome already.
And sterling has been rallying on that idea, the reduction in fiscal risk premium. So for me, it's more about a clearing of event risk and getting past the uncertainty, which just allows parts of the market which maybe were a bit more uncertain or even short sterling to kind of embrace sterling carry. And we saw a similar dynamic when Starmer stepped down in July and we saw that again when the chancellor was appointed later that month in the sense that it wasn't necessarily the candidates.
It was more about the reduction in political uncertainty, allowing the market to embrace carry. And that's that's kind of how I'm seeing the budget event itself in terms of how it stacks up for sterling if you if you get a kind of base case outcome. But obviously, you know, there are other outcomes.
I think if we get we slip below 10 billion headroom, that's optically difficult for the market that might prompt a little bit of weakness in sterling. If the tax measures are a bit harsher, if you go well above 8 percent on the bank surcharge, you know that that could also hurt sterling a little bit. But yeah, so I want to press you here, actually.
Right. I mean, as a levels advocate would tell you, the market seems pretty complacent around the risk here. It seems to me like everyone's kind of converged around these headroom estimates, right.
Ten to 15, which are still pretty small in absolute terms and relative to past budgets. Barnum made some pretty big campaign pledges early on. Now energy prices are back up and in theory should continue to squeeze headroom further.
And communication, you say, has been pretty airtight, maybe outside the bank tax statement last week. So is the market actually underestimating risks of surprises here, either on the tax side or on the spending side? And like, how are you thinking about the tails here for sterling?
Yeah, I think I think you're right. It does create bearish skew in the sense that the market has centered on a fiscally neutral outcome in the budget for such a long time, you know, that the reaction would be larger if you see a disappointment. So, you know, if you get if headroom falls well below 10 billion and you get kind of excessive unfunded spending and the market is baking in, baking fiscal risk premium back in, you know, I think on the day you could see, say, euro sterling, 75 basis points higher as opposed to, say, a kind of 25 to 50 basis point fall in euro sterling on a base case outcome.
So that's that's the kind of skew we're thinking about. But, you know, I would I would say that there are kind of modest disappointments that the market can handle and digest. And I think the difference this time is that there's much less of the doom loop now for euro sterling compared to last year, where growth was being revised down last year.
That meant that as yields rose, you know, that was impacting headroom on a day by day basis and making, you know, creating that doom loop, that kind of vicious cycle where, you know, you had to raise tax by more to build up the headroom. Whereas whereas this time, I mean, our economist has got Q3 growth running at 2 percent annualized, which and our forecast revisions for the UK are at multi-year highs. So it's it allows it's much more digestible now in terms of the tax rise for sterling.
And that means that, you know, if we do get a headroom that's, say, modestly below 10 billion or you get 10 to 15 billion headroom and say, you know, that the bank surcharges is above 8 percent, then I think, you know, initial weakness on sterling on the reaction can be faded and the market will end up buying the dip in sterling and it might not finish up on the day, but it probably would finish up on the week, I'd say. Yeah, maybe that's a good segue. I mean, we've had a couple of seemingly material developments in the UK macro side this week.
Inflation in the labor market seeming to galvanize sterling buying, you know, across discretionary funds. You know, are you leaning into that? And I know you've mentioned Brexit before recently.
I mean, what do you think about the skew of risks to sterling kind of like setting aside the budget here for a moment? Like what's what's kind of the main macro outlook going forward for you? Yeah, I think I thought the data this week was super interesting in the sense that, you know, we got 4.7 on the unemployment rate.
OK, we've got a kind of marginally sticky CPI print, but, you know, Bank of England has the unemployment rate going back above 5 percent. So they're starting to look a bit offside here as we come into the November meeting. And the interesting thing on that from a sterling perspective is we see the rally this year as kind of more about fiscal risk premium, maybe some Brexit risk premium creeping in, as you say, carry positioning growth.
But really, front end rate spreads have taken a bit of a backseat and they've been more something that has held valuations back as the market seen what's gone on as more of a kind of synchronized hiking cycle across the end. And, you know, you look at the way the rate spreads behaving now, maybe there's a narrative starting to creep in. OK, could the Bank of England start to outpace the ECB?
That would just that would give an extra angle to valuations in terms of, OK, you're a sterling two pence cheap on an 83 handle now. But if front end rate spreads start to move, then that opens up. You know, if you're still two pence cheap, you can you can creep onto an 82 handle potentially.
So that's interesting, I think, in terms of the way the data is evolving. As you say, Brexit, we've got the EU summit in November. You know, there is there is a line of thinking where the budget is now actually a little bit boring.
And this is now the new issue in terms of it being a policy goal and the signaling value that comes out of the summit could be quite important for sterling. We've spoken before about potential 7 to 12 percent Brexit risk premium in the trade weighted index for sterling that is not going to disappear completely straight away, but the market can kind of chip away at. And I think if you come out of the summit with signaling value around issues like student education or youth mobility or recognition of professional qualifications, these are all issues that have been discussed before.
And our economist believes, you know, could could provide some some wiggle room in terms of signaling value that I think that that could be important for sterling. And I think finally, something that's really stood out to me is is the positioning angle. And I wanted to turn to you on that.
CFTC positioning for sterling back to all times short. How does that square with your positioning data? And is there anything else to flag on positioning?
Yeah, well, you know, for starters, it certainly doesn't square with intuition. Right. Given kind of the the relative outperformance in sterling and some reasonably decent data performance over over some time and, you know, looking at kind of our other metrics, it would suggest that maybe sterling isn't quite as short as what the futures would say.
So our options flow data would suggest actually cables a little bit, probably flattish on positioning. And similarly, an option zero sterling is actually turned modestly net short. So I think, you know, looking squarely at futures probably exaggerates the extent of the position.
But obviously, at the same time, you can't dismiss that that trading sector, right? It does tend to reflect CTAs and momentum followers. And so I've been describing it as pockets of sterling shorts still exist.
And as and when you pass through event risk like next week and use it as a market clearing event, and like you said, it wouldn't be surprising to me to start to see some of those positions get covered, especially as the broader carry trade around which futures traders have been highly concentrated and oriented around for the better part of last year or so continues to come under pressure with things like max, you know, we're seeing in the futures data, you know, the centricity of the carry trade is actually starting to ebb. So maybe that also provides something of an impetus for that particular sector to cover remaining sterling short. So I think that's possible.
I don't think we're looking at like a two sigma unwind across like the broader discretionary macro community. Again, options aren't signaling that. But I do think there's probably some scope there to do it.
And I think, you know, also euro sterling can probably continue to trend lower. Where I do think, you know, positioning is reasonably crowded on my metrics is in euro kind of across the board. You know, euro dollar positioning kind of like in that one and a half to two standard deviation range.
And a lot of euro crosses following suit. But I don't get the sense that euro sterling in particular is a very crowded short amongst the euro crosses. I think it's probably more confined to things like euro Aussie and the likes there.
So that's another opportunity where maybe you don't get like a positioning online tailwind. But, you know, positioning itself is not obviously a headwind to further euro sterling losses. So yeah, broadly, I think, you know, modest short in some kind of pockets or squares of the positioning community, but room to extend probably sterling length on the whole.
Thanks. Yeah. I mean, you know, just kind of dreaming for a second, if I may.
I mean, that CFTC number is really quite striking to me. And, you know, I agree, Patrick, you know, there is reason to be skeptical. And we've seen this with, you know, for example, euro CFTC positioning data in the past that it hasn't, you know, that there are ways you can look at it that tell you it's not probably it's not giving you the cleanest read.
But if there is any element of truth in that, just kind of thinking broader, longer picture, kind of six month horizon for a second. You know, if you do if if the budget is a clearing event and that positioning does start to reduce in terms of the short positioning and. And this theme around European politics stays with us up to the French election and euro dollar starts to perhaps trade cheap to fair value like like Mira has been been talking about, you know, there's potential for a fairly sized euro sterling downside move, I'd say from here, even after what we've seen into potentially the low 80s or maybe even a seven handle, just if I may speculatively for for a second.
I do think it's it's a really interesting setup and I do think, you know, it's important to kind of zoom out on that chart and look at some of the levels that we were trading at in euro sterling pre Brexit and try and think about, you know, the themes that we have now in terms of French spread widening, et cetera, the persistence of carry and where that could take us in terms of sterling. But, yeah, we'll leave it there. And thanks.
Thanks for joining me, Patrick. Thanks, everyone, for listening. This communication is provided for information purposes only.
Please refer to JPMorgan Research reports related to its content for more information, including important disclosures. 2026 JPMorgan Chase and Company, all rights reserved. This episode was recorded on October 21st, 2026.
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