It’s a big day for the UK and the pound. Chancellor Rachel Reeves is expected to deliver her budget address at 12.30 GMT. The latest reports appear to confirm that the UK's fiscal hole – which we put at £30bn/year after planned giveaways – will be filled through a combination of extending the planned freeze on tax thresholds and a raft of hikes to minor taxes. The outlines of the Budget look well-priced, but what's less clear from the press is how much of the pain will be frontloaded in 2026, ING's FX analyst Francesco Pesole notes.

EUR/GBP volatility moderates pre-budget

"A budget that confirms £10-15bn of upfront tax hikes, which the OBR judges to push down on inflation next year, would be worth a modest dovish BoE repricing and renewed fall in gilt yields. Remember, pretty much whatever happens, the UK's deficit and gilt issuance will fall in 2026, owing to the freeze in tax brackets. But politics remains a major risk. Any sign that political pressure is building on Chancellor Reeves could prompt a renewed sell-off in gilts, if investors begin to price in the possibility of a more pro-borrowing successor."

"From a currency perspective, sterling currently shows no signs of a material fiscal risk premium (calculated via EUR/GBP), and faces two different downside scenarios today. Disinflationary fiscal tightening forces some premium to leave the gilt market, with yields declining, but the dovish repricing in rate expectations causes some moderate GBP depreciation. EUR/GBP rises to 0.880-0.8830. A much worse scenario for GBP where budget announcements don’t convince markets that the fiscal path is sustainable. That could shape into an uncontrolled selloff in gilts and sterling."

"EUR/GBP overnight volatility is at 13.5: high, but below some 2023 peaks and nowhere close to 2022 Mini-Budget 27 levels. The difference between 1-week implied and realised volatility has moderated from just above 3.0 yesterday to 2.2 this morning, therefore below multiple peaks of the past two years."