With the Budget now falling inside the one-week options window, traders have bid up euro-sterling one-week implied volatility to 4.88%, the strongest reading since May. That points to a larger event premium around the statement.
Option risk reversals - a gauge of direction that compares demand for calls and puts - point to a slight bias for pound gains against the euro in the week ahead. Nevertheless, the cost of protection around the fiscal statement has risen. The gap between 1-week and 3-week vols is skewed most toward the front end in five months, despite 3-week contracts also covering the forthcoming Bank of England and European Central Bank meetings.
Markets often choose the euro, rather than the dollar, to express UK-specific risk because the dollar has its own drivers. That separation is murkier this time as the euro faces fiscal and geopolitical pressures of its own.
Figures from the Depository Trust & Clearing Corporation show that, in contracts extending beyond the Budget, participants have positioned to insure against the pound weakening against the dollar, while euro-related positioning is more mixed.
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The Budget arrives with investors focused on how Chancellor of the Exchequer John Healey plans to balance the books.
Meanwhile, fresh figures have bolstered the outlook for further rate increases. UK inflation hit an 11-month peak in September following a surge in petrol and diesel prices, putting the Bank of England on course for its first interest-rate increase in over three years. Schroders' David Rees, who oversees global economics, said: "Expectations are low, but any significant fiscal boost would raise the risk that imported inflation becomes more persistent and force the BOE into a longer tightening cycle."
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