Published by Global Banking & Finance Review®
Posted on November 25, 2025
2 min readLast updated: January 20, 2026
Add as preferred source on GoogleSterling rose for the fourth day as traders brace for volatility ahead of the UK budget announcement. Implied options volatility surged, reflecting market nervousness.
By Ozan Ergenay
London (Reuters) -Sterling headed for a fourth daily rise on Tuesday, while traders piled into the options market seeking protection against heightened volatility in light of Britain's upcoming budget announcement.
The pound, which is heading for a 4.8% gain this year, last traded at $1.3132, up 0.24% on the day, while edging up against the euro, which dipped 0.1% to 87.815 pence.
Reflecting the nervousness over how sterling might react to the budget, the cost of hedging against a large overnight swing in the price has shot to its highest in months.
Overnight sterling implied options volatility, a measure of demand to own derivatives to protect against turbulent price action, shot to nearly 12% on Tuesday, from below 2% at the start of the week, according to LSEG data.
At one point, overnight implied vol for euro/sterling hit its highest since the market turmoil in April, after U.S. President Donald Trump's announcement of sweeping global tariffs.
Francesco Pesole, currency analyst at ING, noted that one-week implied vol for euro/sterling was well above where realised volatility - how much a currency pair is actually moving - and that gap was at the highest since the 2022 mini-budget crisis.
"This signals that, despite some recovery in back-end gilts, the currency market remains concerned ahead of tomorrow's UK budget announcement," he said in a note to clients.
Finance Minister Rachel Reeves will announce her long-awaited budget on Wednesday and is expected to need to raise tens of billions of pounds to stay on track to meet her pre-election promises and fiscal targets.
Sophie Svestad, communications manager at Ninety One, said Reeves faced a difficult balancing act, by attempting to deliver a budget that simultaneously pleased Labour backbenchers, the electorate and the gilt market.
"To try to achieve this we are likely to see an end to the two-child benefit cap and little in the way of new spending cuts," Svestad added.
(Reporting by Ozan Ergenay; Editing by Amanda Cooper and Alex Richardson)
Currency hedging is a financial strategy used to protect against potential losses due to fluctuations in exchange rates. It involves using financial instruments like options and futures to offset risks.
Volatility refers to the degree of variation in trading prices over time. High volatility indicates significant price swings, which can lead to increased risk for investors.
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