GBP short positions soared before the budget, and Damo was bearish to 1.30 at the end of the year

The Zhitong Finance App learned that traders were increasing their bets on shorting the British pound before the new British government's first budget was released a month later. According to industry data, options betting on the fall of the pound against the US dollar in the week after the October 28 budget bill accounted for two-thirds of the market volume this month; according to US Depository Trust and Clearing Corporation (DTCC) data, put options against the euro account for as much as three-quarters. Major banks such as Morgan Stanley have also lowered their forecasts for the British pound one after another.

Investors are concerned about the state of the UK's finances and how the new Chancellor of the Exchequer John Healy will balance the balance. Due to the announcement of the one-month contract covering the budget, the cost of hedging the incident is rising, and the expected volatility of the pound rose to the highest level since July.

Morgan Stanley lowered its forecast for the pound

Morgan Stanley's forex strategist led by David Adams said, “We believe there is asymmetric risk, and investors may add more negative risk premiums to the pound before the October budget.” The Bank of America sharply lowered its forecast for the pound, which is expected to fall to $1.30 by the end of the year and to $1.27 by mid-2027.

The pound is already under pressure due to the US-Iran conflict and the rekindling of demand for the US dollar by the Federal Reserve's interest rate hike. It fell more than 2% this month, the worst performance in nearly a year. The risk reversal indicator, which is a barometer of positions, also reflects bearish bets on the pound.

It is worth noting, however, that there are still significant differences in the market regarding the long-term trend of the British pound. At the end of 2025, Morgan Stanley predicted that the pound is expected to reach the 1.43 to 1.51 range in 2026, and even hit the highest point since the Brexit referendum. The core logic is that the Fed's interest rate cut cycle weakens the dollar's interest rate spread advantage.

Goldman Sachs has a neutral attitude and believes that the upward momentum of the pound may stagnate around 1.35 to 1.36, and expects the Bank of England to cut interest rates to 3% three times in 2026. Wells Fargo is more pessimistic and predicts that the pound will weaken to around 1.31. Currently, market pricing is clearly skewed towards the pessimistic side, and the long and short differences themselves form an important trading background.

British treasury bonds fluctuated sharply

UK bonds fluctuated sharply this month due to concerns about the fiscal situation. The Middle East conflict is driving up the cost of British borrowing, and Healy will seek to repair public finances. The British Treasury bond declined on Monday, while the pound held around $1.3255.

Roberto Cobo Garcia, head of foreign exchange strategy at the Spanish Foreign Bank G-10, said that a credible budget that preserves fiscal space may help curb fluctuations in the British pound and British treasury bonds, but any fiscal consolidation may come at the expense of growth. “We think the budget has limited room for positive surprises,” Cobo Garcia said.

Some treasury bond investors believe that the sharp rise in yield due to the war has made Healy's reconstruction buffer to its original level “unrealistic,” but there are also opinions that a buffer of less than 20 billion pounds will pose a problem, and the government should stick to the level predicted by OBR.

Healy previously stated that it would meet fiscal rules “as a buffer against uncertainty,” but did not specify the specific target size. The government is considering imposing higher taxes on wealth to finance expenses, including bank taxes, raising capital gains taxes, and lowering the “luxury property tax” threshold from £2 million to £1.5 million.