EUR/GBP Forecast: UK Budget Announcement Tests Sterling's Resilience

The UK pound faces a critical test as Chancellor Rachel Reeves prepares to unveil her fiscal strategy, with markets closely monitoring how budget measures might reshape EUR/GBP dynamics. The address, scheduled for 12:30 GMT, represents a pivotal moment for sterling traders and macroeconomic forecasting.

Budget Framework and Market Expectations

UK fiscal planners are signaling that approximately £30 billion in annual budget gaps will be addressed through a combination of tax threshold extensions and various levy increases. Initial market readings suggest these measures have been broadly anticipated, yet uncertainty remains regarding the timing and distribution of fiscal adjustments throughout 2026.

The Budget framework appears constructive on its surface, but market participants are keenly watching whether revenue-raising measures will be concentrated in the coming year or spread across multiple periods.

EUR/GBP Volatility and Policy Implications

Disinflationary Scenario

Should budget announcements confirm £10-15 billion in near-term tax tightening that the Office for Budget Responsibility deems deflationary, two interconnected forces could influence EUR/GBP forecasts. Lower inflation pressures would support a dovish Bank of England repricing, potentially depressing gilt yields. Concurrently, sterling could experience moderate depreciation as rate expectations adjust downward, with EUR/GBP potentially trading toward 0.8800-0.8830 levels.

The 2026 fiscal consolidation appears locked in regardless of policy nuances, as tax bracket freezes will naturally reduce deficit pressures and gilt issuance independent of other measures.

Political Risk and Worst-Case Scenario

Geopolitical and political considerations introduce material risk to the outlook. Should market participants question the sustainability of the UK’s fiscal trajectory, gilt markets could experience an uncontrolled selloff. Such a scenario would amplify sterling weakness considerably, creating challenging conditions for GBP valuations against major currencies like the EUR.

Technical Volatility Assessment

Current EUR/GBP overnight implied volatility stands at 13.5%, elevated by historical standards yet below multiple 2023 peaks and substantially lower than the volatile 2022 Mini-Budget episodes when volatility reached 27%. The differential between one-week implied volatility and realized movements has compressed to 2.2% from previous day levels above 3.0%, suggesting markets have moderated near-term uncertainty expectations.

This compression indicates that while tension surrounds today’s announcement, it has not reached crisis-level pricing, leaving room for significant EUR/GBP forecast adjustments in either direction based on actual budget content and market reception.