Sterling Under Scrutiny as UK Budget Announcement Looms – What Happens to GBP?

The pound is in focus today as Chancellor Rachel Reeves prepares to unveil the UK’s fiscal strategy. The budget address, scheduled for 12:30 GMT, is expected to tackle a significant fiscal gap—estimated at around £30 billion annually—through a combination of tax threshold freezes and adjustments to minor levies.

Market Positioning Ahead of Budget

For those tracking the GBP to USD exchange rate (currently around 1.27, meaning 28 GBP to USD converts to approximately $35.56), today’s announcement carries real implications. The pound has stabilized somewhat in recent trading sessions, though expectations remain fluid about what the budget will ultimately deliver.

The currency market is pricing in two distinct scenarios. In a scenario where the budget confirms £10-15 billion in immediate tax increases that the Office for Budget Responsibility expects to cool inflation pressures next year, sterling could experience modest weakness. The reasoning: stricter fiscal controls typically prompt expectations of interest rate cuts from the Bank of England, which weighs on currency valuations.

“In this base case, EUR/GBP could drift toward 0.8830-0.8860 range as gilt yields decline and rate-cut expectations rise,” according to market analysts tracking the pair. “However, the UK’s deficit naturally shrinks in 2026 due to the tax bracket freeze, which provides some underlying support to the currency.”

Downside Risks to the Pound

A more challenging scenario exists if markets judge the government’s fiscal path as unsustainable. Such doubts could trigger a sharp reversal in gilts and sterling alike, potentially forcing the pound lower across the board—impacting the GBP to USD rate and other currency pairs significantly.

Political dynamics add another layer of uncertainty. Should pressure mount on Chancellor Reeves regarding her fiscal strategy, investors might begin pricing in a potential successor with more accommodative borrowing policies. This could spark renewed selling pressure in sterling.

Volatility Expectations

Overnight currency volatility in the EUR/GBP pair stands at 13.5%—elevated but well below the chaos levels seen during the 2022 mini-budget crisis, which touched 27%. The gap between one-week implied volatility and actual price swings has narrowed to 2.2, suggesting markets aren’t pricing in extreme moves despite today’s significance.

The pound currently shows no material premium for fiscal risk, leaving room for meaningful moves in either direction once Reeves speaks. Traders monitoring the GBP to USD rate and related pairs should prepare for potential shifts in rate expectations and sterling positioning based on the budget’s fiscal credibility.