Fiscal Musings Keep Driving Sharp Sterling Depreciation, Implied Vols Surge

Sterling has depreciated this morning as Asia-Pac participants assessed the mini-budget unveiled last Friday, with UK gov't pledging sweeping tax cuts and new spending measures. During his weekend round of interviews, Chancellor Kwarteng dismissed concerns over the sharp fall in GBP and hinted at more tax reductions to come.

• Cable is hitting session/37-year lows at $1.0705 at typing, which puts the March 1985 record low of $1.0520 within sight. GBP/USD 1-month implied volatility has extended its upswing to 18.1%, its best level since the outbreak of the COVID-19 pandemic in early 2020. EUR/GBP is having a look above GBP0.9000 for the first time since early 2021, with implied vols soaring in kind.
• EUR confidence may have been boosted by the likely aversion of the worst-case scenario for Italian general election, as the right-wing bloc seems poised to fall short of winning a free hand to amend the constitution, albeit the initial reaction in FX markets was limited.
• Sterling weakness is aiding the broader U.S. dollar, pushing it to the top of the G10 currency scoreboard. The BBDXY index printed fresh record highs at 1,344 as the greenback becomes the main beneficiary of GBP sell-off.
• USD strength underpins upswings in the likes of USD/KRW and USD/CNH to fresh cyclical highs as we await the PBOC's yuan reference rate fixing.
• New Zealand's financial markets are closed in observance of a Memorial Day for the late Queen Elizabeth II.
• The central bank speaker slate is tightly packed today. President Lagarde headlines a parade of ECB members, while comments are also due from Fed's Bostic, Mester & Logan, as well as BoE's Tenreyro & BoJ's Kuroda. German Ifo survey takes focus on the data front.