Human perception is invariably accompanied by a graded feeling of confidence that guides metacognitive awareness and decision-making. It is often assumed that this arises solely from the feed-forward encoding of the strength or precision of sensory inputs. In contrast, interoceptive inference models suggest that confidence reflects a weighted integration of sensory precision and expectations about internal states, such as arousal. Here we test this hypothesis using a novel psychophysical paradigm, in which unseen disgust-cues induced unexpected, unconscious arousal just before participants discriminated motion signals of variable precision. Across measures of perceptual bias, uncertainty, and physiological arousal we found that arousing disgust cues modulated the encoding of sensory noise. Furthermore, the degree to which trial-by-trial pupil fluctuations encoded this nonlinear interaction correlated with trial level confidence. Our results suggest that unexpected arousal regulates perceptual precision, such that subjective confidence reflects the integration of both external sensory and internal, embodied states.