GBP/USD eased towards 1.32, but may remain volatile as Labour’s Andy Burnham leads the Makerfield by-election. The developing result has injected uncertainty into the near-term UK political outlook, with markets watching whether the move could alter expectations for fiscal policy and the direction of government economic strategy.
Burnham is expected to challenge Prime Minister Keir Starmer for the party leadership once he enters parliament. His left-leaning policy preferences and the constraints imposed by fiscal rules have raised questions over future plans for defence and taxation, and uncertainty on that front could pressure Gilts and the Pound. Burnham has reportedly sought guidance from economists Andy Haldane and Jim O’Neill to strengthen policy credibility, while the article itself was produced with an Artificial Intelligence tool and reviewed by an editor.
Rising Volatility And Market Reaction To Political Uncertainty
We believe the political uncertainty surrounding the Makerfield by-election points to higher volatility for the British Pound. The 1-month implied volatility for GBP/USD has already risen to 7.8%, up from 6.5% last month, indicating that options markets are pricing in larger price swings. Traders should anticipate that this trend will continue as the by-election approaches.
This situation is reminiscent of the fiscal uncertainty in late 2022, which saw the pound fall sharply against the dollar. We are already seeing UK 10-year Gilt yields climb to 4.4%, a two-month high, as investors demand a higher premium for holding UK debt. This bond market weakness often precedes currency weakness, creating a bearish outlook for GBP.
Option Strategies For Navigating Uncertainty
Given the potential for a drop towards the 1.3200 level, we view buying GBP/USD put options with July and August expiries as a sensible strategy. This provides downside protection with a clearly defined risk. The uncertainty also makes option spreads, like a bear put spread, an attractive way to position for a moderate decline while keeping premium costs low.
For those less certain on direction but expecting a significant move, going long volatility through a straddle strategy could be effective. The current political climate suggests a binary outcome, where either the uncertainty clears, causing a relief rally, or it worsens, triggering a sharp sell-off. This makes strategies that profit from a large move in either direction particularly relevant.
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