Pound near 17-month high on euro a day ahead of British budget

LONDON, Oct 27 (Reuters) - The pound dipped against the dollar and held near a 17-month high versus the euro a day ahead of the British budget announcement, in which finance minister John Healey will seek to strike a balance between the wishes of bond investors and government promises to ease the cost of living for households. 

Sterling was at 83.67 pence per euro, a fraction firmer on the day, and closing in on last week's 83.63, which was its strongest on the common currency since May 2025. 

It was down 0.2% against the dollar at $1.3316, though that was more reflective of the dollar, which was also firmer on the euro, Japanese yen and Swiss franc. 

The pound has been rallying on the euro as traders expect a largely undramatic budget on Wednesday, while political ructions in France have jolted French government bonds dramatically and weighed on the shared currency.

Healey is likely to offer some help to households facing another rise in energy bills and he has hinted that businesses will get "breathing space" from rising costs.

But against a backdrop of the US-Israeli war on Iran, which has driven up inflation and taken government bond yields worldwide to multi-decade highs, markets could take fright if he delivers a big spending and tax-raising budget. 

And investors think Healey has heard their warnings. 

"UK investors we spoke to into the Budget largely expect a low-key, low-volatility event," said analysts at Morgan Stanley in a Tuesday note, setting out their final thoughts ahead of the event. 

Also in focus will be how much "fiscal headroom" Healey leaves, the amount and type of borrowing, and also how likely it is the path he outlines can be delivered.

"Market participants we talked to zoomed in more on the perceived plausibility of the fiscal plan and any near-term borrowing increases which might be presented as one-offs and temporary, but seen by the market as permanent," said Morgan Stanley. 

Currency options markets also suggest traders are expecting a fairly muted event. 

Euro/sterling overnight implied volatility, a gauge of the scale of an expected move in a currency pair across the coming day, was last 5.3%, an increase from recent sessions but below the more than 10% recorded just ahead of last year's budget. 

Sterling/dollar overnight implied vol was 8%, a level last hit earlier this month. 

(Reporting by Alun John; Editing by Hugh Lawson)