Sterling Volatility Peaks as UK Faces Fiscal Policy Uncertainty Ahead of Budget

The UK's economic landscape has undergone significant changes over the past few months, leading to increased uncertainty and its impact on the pound.

With a new Chancellor in place, Andy Burnham, who replaced Rachel Reeves, there is concern about the future direction of fiscal policy. The September 8 auction of 30-year gilts at 5.8168% cut the Chancellor's fiscal headroom to roughly £13 billion.

The previous Budget, delivered in November 2025, raised taxes by £26 billion per year by the 2029-30 fiscal year, but virtually none of those increases took effect in 2026. The Office for Budget Responsibility projected UK government debt rising from 95% of GDP to 96.1% by the end of the decade.

The energy shock has worsened that picture, with higher oil prices raising inflation-linked debt costs and pushing up government spending on energy support. This weighs on growth, and the war with Iran has pushed borrowing costs up across the developed world, but the UK's large share of index-linked gilts makes its debt costs especially sensitive to inflation.

The upcoming October 28 Budget creates a binary event for the pound, which could either trigger a repeat of past gilt market selloffs or restore fiscal headroom and support sterling. Until then, uncertainty over the outcome caps sterling rallies.