Scalping cable while the UK budget statement is being delivered

[Fairman]

Scalping cable while the UK budget statement is being delivered

The UK budget is an odd event to trade. It isn't a single number released at a fixed second like CPI. The Chancellor speaks for about an hour from around half past twelve London time, and the market reacts in bits as each measure comes out. Then the official forecasts and documents get published, usually once the speech ends, and gilts can move hard on the borrowing figures.

For GBPUSD and EURGBP that makes the afternoon unpredictable. Sometimes the speech passes with barely a twitch because most measures were briefed to the press in the days before. Other times there's a surprise on borrowing or fiscal rules, gilt yields jump, and sterling moves with them, sometimes in the direction you wouldn't expect from the headline.

How I handle it: no open GBP positions going into the start of the speech. During the speech, I watch the gilt futures or a ten year yield chart if I can get one, because the bond market usually reacts first and sterling follows. If yields are steady, I treat cable as a normal afternoon with wider spreads. If yields are moving sharply, I stay out until the documents are out and the first wave has settled.

The key is remembering that the whole thing runs for over an hour. One calm ten minutes doesn't mean the risk has passed.

[FXS HongKong Scalper]

The drip feed of measures is what makes the budget so awkward. I would add the Debt Management Office remit, which usually comes out shortly after the speech and shows how much gilt issuance is planned. A bigger number than expected has moved gilts and sterling more than any tax headline in recent budgets. Gilt futures are a useful second screen that afternoon. If the ten year yield jumps while cable drops, that is the market worrying about borrowing, and those moves tend to continue rather than fade.

[Fairman]

The direction of the sterling reaction isn't always obvious. Higher borrowing can push gilt yields up, which you might expect to support the pound. But if the market reads it as a loss of confidence in UK finances, sterling falls while yields rise. That combination is the one to watch for, since it tells you the move is about risk, not rates. When yields and the pound move opposite to their usual relationship, I'd rather sit on my hands than try to guess how far it goes. Those episodes can run for days, so there's no rush to be involved in the first hour.

[Fairman]

The Office for Budget Responsibility forecasts are often where the real surprise sits, more than the speech itself. They come out as a document that the market has to read through, and the numbers on growth and borrowing get picked over in the minutes after release. Price can be flat during the speech and then lurch once these hit. Knowing roughly when they're due and keeping size at zero until they're out is the simplest way to avoid being caught by the second reaction instead of the first. In recent years the forecasts have been published as soon as the speech finishes, so the end of the speech is the moment to be most careful.

[Fairman]

EURGBP can be cleaner to trade than cable in the aftermath, because the dollar side is removed. If US data or a Fed speaker happens to land the same afternoon, cable gets pulled two ways, and reading the sterling move becomes harder. EURGBP shows the pound's reaction more directly. Spreads on EURGBP widen during the event too, so the same rule of waiting until the documents are out applies. Once things settle, the cross often trends more steadily than cable for the rest of the session. I'd still trade it smaller than a normal afternoon, since liquidity takes a while to come back after an event like this.

[Fairman]

Pre briefing has become such a habit that a lot of the budget is known before the day. Reading the main headlines from the week before gives you a sense of what's priced in. If almost everything was trailed, the speech itself is often a non event and the afternoon can be traded fairly normally after the first few minutes. If the press coverage has been full of uncertainty about one particular measure, that's the part of the speech where I'd expect any real move. Keep in mind that leaks and briefings can also be wrong, and the market punishes those surprises quickly.