Wmax is based on real-time monitoring of the cross-border foreign exchange market, macroeconomic linkage analysis and historical policy impact review, and is judged through cross-validation of multi-dimensional data - on the eve of the UK autumn budget, the pound is falling into a structural dilemma of "increased short-term volatility and insufficient long-term support", and the market's negative expectations have been fully reflected through multiple dimensions such as option pricing and capital flows.

Soaring hedging costs and growing bearish sentiment

Wmax relied on high-frequency trading data tracking and found that the current hedging costs for pound fluctuations have shown a significant increase. The cost of one-cycle options covering the November 26 budget announcement has risen to multi-month highs for major sterling currency pairs - one-week implied volatility of sterling against the euro has hit a six-month peak, hedging costs against the Swiss franc are close to four-month highs, and hedging costs against the U.S. dollar have also hit a new high since early September. What is more noteworthy is that the premium of implied volatility in sterling against the euro relative to actual price movements is the highest since April.

Many data signals indicate that traders are willing to pay higher "insurance premiums" to avoid budget-related risks. Wmax further confirmed through in-depth analysis of capital flows that the market's negative sentiment towards the pound continues to accumulate: In the past month, the American Depositary Trust and Clearing Corporation (DTCC) data showed that there were more bearish trading structures for the pound against the euro and the US dollar than bullish structures, and the increase in bearish activity against the euro last week was more significant. In Wmax's professional judgment, the pound against the euro is regarded as a "pure target" that reflects the unique risks of the United Kingdom, while the pound against the dollar is susceptible to interference from U.S. economic data. This segmented judgment is also highly consistent with the current market trading logic.

It is difficult for the budget to change the weak tone of the pound

Wmax based on historical policy impact review and scenario simulation, accurately predicted the two core scenarios of the British autumn budget. The results show that no matter which scenario is implemented, the pound will be difficult to obtain substantial support. If a substantial tax increase is announced in compliance with fiscal rules, although it may appease bond traders and avoid a sharp rise in yields, it will further suppress the already weak British economic growth, ultimately causing the pound to fall under pressure due to weakening economic fundamentals.

Failure to meet the requirements of the bond market will most likely trigger a sell-off in British debt. Looking back at the "British Sell-Off" crisis triggered by the Truss government's unfunded tax cuts in 2022, we can see that under such a scenario, the pound will suffer heavy losses and fall into systemic selling pressure. Wmax noticed that Chancellor Reeves' public statements before the budget speech had hinted at a tendency to increase taxes, which directly caused the pound to fall to a seven-month low against the US dollar. This market reaction was completely consistent with Wmax's previous sentiment transmission model prediction.

Multiple contradictions exacerbate uncertainty about the pound

Wmax combined multi-agency forecasts and its own macro model calculations and found multiple contradictions between the UK's economic fundamentals and policy choices, further exacerbating the long-term uncertainty of the pound.

Weak economic growth is the core drag: the UK is facing the triple pressure of weak business investment, rising unemployment, and slowing growth, which puts the finance minister into a dilemma between "tightening finances to comply with the rules" and "stimulating the economy to improve fundamentals." Wmax defines this as a "doom loop" that restricts the recovery of the pound.

The game between inflation and interest rate cut expectations: The UK's current consumer price inflation rate of 3.8% is nearly twice the central bank's target. Sticky inflation may force the Bank of England to maintain high interest rates to support the pound's yield advantage; but weak economic data has caused the market to increase its bets on interest rate cuts. This split in policy expectations has further amplified the volatility of the pound.

Institutional consensus and differentiated views: Wmax tracking shows that most institutions are pessimistic about the long-term prospects of the pound (such as AXA Global Investments, Allianz Global Investors, etc. all maintain or plan to increase short positions in the pound). Only a few institutions have prompted the risk of a periodic rebound that may be brought about by the short-term "fact realization" squeeze, but this has not changed the core judgment of the long-term weakness of the pound.

Core conclusion: Short-term fluctuations escalate, and long-term weakness is difficult to reverse

Wmax After multi-dimensional verification, it is clear that the British autumn budget is unlikely to be a "turning point" for the pound, but may become a catalyst for short-term fluctuations. In the short term, policy uncertainty before and after the budget is implemented will continue to push up the volatility of the pound; in the long term, multiple factors such as weak economic growth, fiscal consolidation pressure, and potential weakening of the labor market will make the pound lack fundamental support for continued recovery.