UK Budget Day: What Sterling Traders Need to Watch

Chancellor Rachel Reeves’ budget announcement at 12:30 GMT is shaping up as a critical moment for GBP markets. The underlying fiscal strategy appears straightforward—a combination of tax threshold freezes and minor tax increases will address the estimated £30bn annual fiscal gap. However, the timing of these measures remains the real question mark for currency traders.

Currency Volatility: When Fiscal Policy Meets Rate Expectations

Today’s EUR/GBP trading could swing sharply depending on how markets interpret the budget’s inflation impact. If the announced measures deliver roughly £10-15bn in immediate tax tightening that the Office for Budget Responsibility deems disinflationary, sterling could face a complicated picture. The Office of Budget Responsibility’s inflation assessment would likely trigger some dovish repricing of Bank of England rate expectations, which typically weakens GBP in the near term.

The scenarios playing out in FX markets suggest EUR/GBP might move toward 0.8820-0.8830 under a moderately dovish outcome, even though the fiscal tightening itself should be supportive for the currency. For those tracking GBP against the US dollar, understanding this dynamic matters—sterling weakness often correlates with broader dollar strength, potentially affecting the broader 220 GBP to USD conversion rate trajectory throughout 2025.

The Gilt Market’s Critical Role

Sterling traders shouldn’t overlook the gilt market’s potential reaction. The UK deficit will structurally decline in 2026 due to the tax bracket freeze alone, reducing gilt supply—a structural positive. However, if budget details fail to convince investors the fiscal path is truly sustainable, gilts could see an uncontrolled selloff. Such a scenario would likely drag sterling down sharply alongside rising yields.

Political risk adds another layer of uncertainty. Any perception that fiscal pressure is mounting on Chancellor Reeves could spark renewed gilt weakness and sterling depreciation if markets begin pricing in a potential successor with more borrowing-friendly policies.

Volatility Levels: Still Elevated but Contained

EUR/GBP overnight implied volatility sits at 13.5%—elevated compared to recent weeks but substantially below the 27% levels seen during the September 2022 mini-budget crisis. The gap between one-week implied and realized volatility has tightened to 2.2 from 3.0, suggesting markets have partially priced in the event risk. This compression hints that today’s move, while potentially significant, may not produce the extreme moves some traders feared.

The pound faces divergent outcomes: either modest dovish repricing with controlled GBP softening, or a confidence crisis scenario where sterling and gilts both sell off sharply. Position your hedges accordingly.