UK Budget Day: Why GBP Traders Are Watching EUR/GBP Volatility This Close

With Chancellor Reeves set to unveil the UK budget today at 12:30 GMT, the pound faces a critical juncture. The fiscal picture is becoming clearer – reports suggest a £30bn annual fiscal gap that will likely be addressed through a mix of tax threshold freezes and targeted tax hikes, potentially totaling £10-15bn in immediate pain for 2026.

The GBP Scenario Map: Two Roads Ahead

Markets are pricing in two very different outcomes for sterling and EUR/GBP:

Scenario 1 – The Positive Repricing: If the budget convinces investors that fiscal consolidation is genuine and disinflationary, gilt yields could compress. This would normally support GBP. However, lower yields trigger dovish expectations around Bank of England rate cuts, which simultaneously pushes EUR/GBP higher toward 0.880-0.8830. It’s a tale of two forces working against sterling.

Scenario 2 – The Crisis Narrative: If markets lose confidence that the fiscal path is sustainable, gilts could suffer an uncontrolled selloff. Sterling weakness would follow – a much steeper decline than scenario one, with both rate expectations and fiscal credibility dragging GBP down.

Volatility: High, But Not Historical Extremes

EUR/GBP overnight volatility sits at 13.5 – elevated, yet nowhere near the chaos of the 2022 Mini-Budget (which saw 27-level volatility). The gap between implied and realized volatility has tightened from 3.0 yesterday to 2.2 this morning, suggesting markets aren’t fully bracing for a shock.

Why Political Risk Matters More Than Numbers

Here’s what traders are really watching: Any political pressure on Chancellor Reeves could change the entire game. If the successor looks more borrowing-friendly, gilt investors will rotate out fast, triggering renewed sterling weakness. The numbers might be right, but the politics might be wrong – and that’s where real GBP risk lives today.