Traders are increasing bets against the British pound ahead of the UK government's upcoming budget. Options expiring after the October 28 budget now account for two-thirds of monthly sterling-dollar volumes, according to Depository Trust data. Against the euro, three-quarters of options reflect expectations of a decline.

Investors worry about the UK's fiscal position under new Chancellor John Healey. The cost of hedging this event has risen, with volatility hitting July highs. Morgan Stanley strategists, led by David Adams, have slashed forecasts, predicting the pound will slide to $1.30 by year-end and $1.27 by mid-2027.

The currency has already lost over 2% this month due to the US-Iran conflict and Federal Reserve rate hikes. Risk reversals also show bearish positioning. BBVA's Roberto Cobo Garcia notes a credible budget could limit volatility, but fiscal consolidation may hinder growth.

Gilts declined on Monday while the pound held near $1.3255.