It’s a great day for the UK and the pound. Chancellor Rachel Reeves is expected to deliver her budget speech at 12.30 GMT. The latest reports appear to confirm that the UK’s fiscal hole – which we estimated at around £30bn a year after planned giveaways – will be plugged through a combination of an extension of the planned freeze on tax thresholds and a range of simple tax rises. The broad outlines of the budget look well priced, but what is less clear from the press is how much pain will be charged in 2026, notes Francesco Pisole, FX analyst at ING.
EUR/GBP volatility moderate ahead of budget
“A Budget that confirms a £10-15 billion advance tax rise, which the OBR sees as lowering inflation next year, merits a modest repricing from the Bank of England and a renewed decline in government bond yields. Remember, almost whatever happens, the UK’s deficit and government bond issuance will fall in 2026, due to the freezing of tax brackets. But politics remain a major risk. Any sign that political pressures are building on Chancellor Reeves could trigger renewed selling for government bonds, if investors begin to price in the possibility of a more pro-borrowing successor.
“From a currency perspective, the GBP is currently showing no signs of a material financial risk premium (calculated via EUR/GBP), and faces two different bearish scenarios today. Deflationary fiscal tightening is forcing some premiums to leave the gilt market, with yields falling, but a cautious repricing in price expectations is causing some moderate depreciation in GBP. EUR/GBP rises to 0.880-0.8830. Much worse scenario for the pound Sterling: Budget announcements do not convince markets that the fiscal path is sustainable, and this could lead to uncontrolled selling in government bonds and the pound.
“EUR/GBP overnight volatility is at 13.5: high, but below some of the 2023 peaks and nowhere near 2022 mini-budget 27 levels. The spread between implied and realized one-week volatility has moderated from just above 3.0 yesterday to 2.2 this morning, and thus below multiple peaks in the past two years.”
