Pound Extends Gains as Markets Eye High-Stakes UK Budget

Sterling rose for a fourth consecutive session on Tuesday, with investors closely watching the growing tension in currency markets ahead of Britain’s highly anticipated budget announcement. The pound strengthened both against the U.S. dollar and the euro, even as traders rushed into the options market to hedge against potential turbulence.

The British currency traded at $1.3132, up 0.24% on the day and on track for an annual gain of 4.8%. Sterling also edged higher against the euro, which slipped 0.1% to 87.815 pence.

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Options Trading Surges as Volatility Expectations Soar

Market jitters ahead of the budget have driven a dramatic surge in overnight sterling implied volatility, a key barometer of investor demand for protection against sharp price swings.

According to LSEG data:

• Overnight GBP/USD implied vol jumped from below 2% earlier this week to nearly 12%—its highest level in months.
• Euro/sterling implied volatility briefly reached its highest point since the April global tariff shock, triggered by the announcement of sweeping U.S. trade measures.

This signals that traders expect significant overnight currency movement once the budget is revealed.

ING currency strategist Francesco Pesole noted that one-week implied volatility for the euro/sterling pair sits far above the actual movement observed in recent trading—a divergence not seen since the 2022 UK mini-budget crisis. He emphasized that this reflects ongoing market caution despite recent improvements in longer-dated UK government bonds.

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All Eyes on Chancellor Rachel Reeves’ First Budget

The heightened market tension comes ahead of Chancellor Rachel Reeves’ long-awaited budget, set to be unveiled on Wednesday. Reeves is expected to face a difficult path as she attempts to reconcile:

• Fiscal responsibility,
• Labour’s pre-election spending commitments, and
• Market confidence in UK government bonds.

Analysts anticipate that Reeves will need to secure tens of billions of pounds to stay aligned with her fiscal rules, potentially reshaping welfare spending and taxation.

Sophie Svestad, communications manager at Ninety One, highlighted the political and economic balancing act ahead:

“Reeves has to design a budget that satisfies Labour backbenchers, reassures the electorate, and keeps gilt markets stable.”

Many analysts expect the Chancellor to end the two-child benefit cap, while avoiding major new spending cuts—an approach intended to stabilize political support while managing fiscal pressures.

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Market Outlook

Sterling’s recent strength shows resilience, but the surge in volatility pricing suggests traders are preparing for a potentially sharp move in either direction once the budget is released. With fiscal policy, bond markets and political expectations all colliding, Wednesday’s announcement is set to be one of the most closely watched UK economic events of the year.