GBP: Vols See First Labour Budget as Easily Digestible vs. Tory Predecessors
GBP overnight vols have been marked up to 10.2 points against the USD, and 7.9 points against the EUR as one-day options markets capture the post-UK budget expiry - this implies a ~60 pip swing in GBP/USD and ~30 pip swing in EUR/GBP into tomorrow's NY cut, exceeding the implied swing seen for this year's March Budget (6th March '24), but falling well short of the prevailing levels ahead of the Sep '22, Nov '22 and March '23 fiscal events.
Figure 1: Prevailing GBP implied vols are notably lower for this Budget vs prior UK fiscal events
The more muted levels of vol may suggest that while Reeves intends to make broad changes to fiscal rules, the structure of taxation and, thereby, the Gilt remit - the impact on the BoE's policy cycle will be minimal - with the uptick in infrastructure spending to be gradual, leaving the BoE to proceed with sequential rate cuts toward neutral.
The considerable skew toward 2w vols in today's vol curve isolates the US Presidential election as a more consequential market event - with vol markets at their most elevated for an election since 2008: Vol Markets See This Year's Election as Most Consequential Since '08
Our full budget preview is found here: https://mni.marketnews.com/3YBr39n