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Pound sterling can recover as uncertainty is lifted.
The pound to dollar exchange rate (GBP/USD) could recover if this week's budget set-piece does just enough to reassure investors that the UK isn't facing an imminent debt crisis.
Budget 2026 will see the government lay out tax changes that will aim to generate between £20BN and £30BN, depending on who you ask.
That's quite the range and opens the door to a host of outcomes that means the day should be an interesting one with the potential to generate notable volatility.
One-week risk reversals on the options markets show investors are positioned for intraday volatility of about 1.0%, which is quite significant and tells us that those with pound into dollar payments, and vice versa, should be ready to act quickly on any beneficial moves.
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The risk for GBP is that Chancellor Rachel Reeves fails the credibility test and that the announced tax hikes are judged by markets to be both inefficient and ineffective.
This could push UK bond yields higher and the pound lower, in a sign of distress akin to the Liz Truss mini-budget.
However, markets have sold sterling for weeks now in anticipation of a bad budget, meaning it's already absorbed a hefty risk premium.
"The GBP has priced in a fiscal risk premium over the past month, with the broader USD rally also contributing to a lower GBPUSD," says a note from the UBS Chief Investment Office.
GBP/USD fell steadily through September and October, from 1.3650 to a low of 1.3010 on November 04, from where it has entered a sideways consolidation that tops out at 1.32.
With positioning still leaning one-sided against sterling, there's a good chance (above 50%) that the market actually breathes a sigh of relief once the event has passed.
Just the lifting of uncertainty might be enough to trigger a rebound.
"The Autumn Budget presents a two-sided risk, but we expect the fiscal risk premium to be priced out after the event, supporting GBPUSD toward 1.34 by year-end," says UBS CIO.
"With heightened market attention, the government’s main priority is to reassure fiscal soundness by adhering to fiscal rules and increasing headroom. We think they will deliver just that, which should translate into the removal of GBP’s risk premium and a boost to GBPUSD," adds the note.
The Budget: What to Watch
The government heads into the 26 November Autumn Budget with an estimated £20bn deterioration in fiscal headroom against the deficit rule.
Goldman Sachs expects the Chancellor to deliver a £25bn net fiscal consolidation (0.7% of GDP), raising headroom to around £15bn after new measures.
A larger adjustment to household energy bills is now anticipated, costing £4.3bn initially, replacing the previously expected VAT cut.
A freeze in fuel duty and extension of the temporary 5p cut remains expected, costing £3bn in FY2026.
Spending cuts look set to be modest at around £3bn, with departmental budgets broadly unchanged through FY2028.
Welfare changes include around £1bn in savings but also the full lifting of the two-child benefit cap, costing £3.5bn.
This means around £30bn of tax increases will be needed, likely delivered through a package of smaller measures rather than income tax rate rises.
Extending personal tax threshold freezes to 2030 is expected to raise £10bn, with other measures spanning council tax, pensions, CGT and gambling.
New measures are expected to deliver a 0.2% cumulative drag on demand, while energy-related policies should reduce headline inflation by 0.4pp in 2026.
OBR forecasts are likely to show higher CGNCR in FY2025 (+£8bn) but little change in FY2026, with downward revisions later due to lower borrowing and reduced APF losses.