Chancellor Rachel Reeves delivered her autumn budget on 26 November, setting out her plans against an uncomfortably weak economic backdrop. The UK remains mired in low productivity, worryingly high debt, subdued growth and a tense political climate.
In the weeks before the announcement, the pound slid sharply, pushing GBP/USD to its worst level in seven months and driving GBP/EUR to a 30-month low. By the time Reeves reached the dispatch box, Sterling was arguably oversold, leaving space for a mild rebound once uncertainty cleared.
The budget has now passed, but its consequences will continue to ripple through the currency market. Investors are weighing its effect on growth, fiscal stability, inflation and the Bank of England’s (BoE) policy outlook. Taken together, these factors could be a drag on the pound through 2025-2026, even if the budget briefly steadied the ship.
While Reeves strengthened the UK’s fiscal stance on paper, GBP faces potential pressures from weak long-term growth and the increasing likelihood of more interest rate cuts. Political risks also remain a wild card.
How GBP exchange rates responded to budget day
Sterling edged higher immediately after the budget, buoyed by an end to the uncertainty. Markets also reacted warmly to the Chancellor’s decision to keep a sizeable margin of fiscal headroom, with a £22bn buffer exceeding expectations and more than doubling the £10bn she left herself in the spring.
Even so, the pound’s gains were modest. GBP/USD and GBP/EUR climbed off recent lows but stayed close to the troughs reached earlier in November. The announcement proving a bump for the pound, rather than underpinning a full recovery.
The pound’s outlook in the months ahead
The pound enters the post-budget period on slightly firmer ground than before the announcement. Fiscal and political uncertainty have eased for now, but markets are far from convinced that the budget marks a turning point for the UK’s economy fortunes.
Adam Solomon, Corporate Account Director at TorFX, sums up our expectations:
We have seen some gains for the pound post budget because the whole bearish narrative was well priced in and had been simmering for weeks. The lift in the fiscal buffer sits well with the bond market because it helps with fiscal credibility, and we have seen yields modestly lower since the announcement.
I think there is some modest upside for the pound in the short term because the uncertainty of the budget has been removed, but if you look at the macroeconomic picture, it’s not pretty.
Virtually zero economic growth, very high inflation and unemployment at a four-year high. There is a high probability of a cut in UK interest rates in December, so I would be surprised if we see the pound extend gains much beyond where we sit currently.
How the budget shapes the BoE’s rate path
Stronger tax receipts gave Reeves some breathing room, enabling her to avoid more severe fiscal tightening. Nonetheless, several measures – including support for energy bills and rail fares – are expected to soften inflation.
That shift cemented bets for another Bank of England (BoE) interest rate cut before the end of the year. Ahead of the budget, traders assigned a roughly 85% chance of a December rate cut, which rose to 90% following the budget.
Unless upcoming inflation data surprises to the upside, a December cut looks highly likely. If the budget accelerates the BoE’s wider easing cycle into 2026, Sterling could face headwinds well into the first half of next year.
Economic growth prospects after the budget
The Office for Budget Responsibility (OBR) upgraded its 2025 growth projection from 1% to 1.5%, though it simultaneously cut estimates across the following four years. Any near-term improvement may help support the pound, particularly if upcoming data aligns with the OBR’s more optimistic 2025 forecast.
Beyond that, however, the picture is less encouraging. Much of the downgrade stems from the OBR’s reassessment of productivity trends since the financial crisis. Crucially, the OBR’s Chair, Richard Hughes, noted that none of the measures in the budget are expected to materially lift long-term growth. Some economists argue that the fiscal stance could even tighten economic conditions further in 2026.
Reeves maintains the opposite – that the budget lays the groundwork for stronger growth – but for now, risks to Sterling appear tilted toward the downside.
Fiscal credibility wins markets over – for now
One area where the budget had a material impact was the UK bond market. Reeves’s £22bn buffer soothed gilt markets and reinforced her reputation as a steady pair of hands. Investors generally judge her approach to be pragmatic and responsible, and that perception of fiscal credibility may offer the pound some resilience in the coming months.
There are caveats, however. Several spending pledges land early in the fiscal cycle, while certain tax rises are scheduled close to the next general election – a timing some analysts consider politically fragile. The Institute for Fiscal Studies (IFS) has already cautioned that elements of the plan may amount to ‘fiscal fiction’.
Another vulnerability is that the UK’s fiscal cushion remains smaller than the historical average. External shocks – which have proven increasingly common in recent years – could easily erode the buffer.
Political tensions simmering below the surface
There can be no doubt that Reeves faced a balancing act this year to appease both markets and labour backbenchers, with the Chancellor seeking to see off a rebellion with measures including lifting the two-child benefit cap, introducing a mansion tax and an online gambling levy, and raised the minimum wage.
While these moves may temporarily quiet dissent on the backbenches, Starmer’s leadership continues to face pressure from both wings of the party amid falling poll ratings. The May local elections could amplify this tension. Although the budget may have reduced immediate political risk, markets recognise that volatility could re-emerge.
What GBP traders will be watching next
With the initial reaction fading, investors are shifting their focus to the real-world impact of Reeves’s tax and spending plans.
The BoE’s next monetary policy decision arrives on 18 December, where a rate cut appears likely. While this cut is largely priced in, any hints towards further cuts in the first half of 2026 could weigh on Sterling.
Economic data also remains central. Indicators such as GDP, inflation, retail activity, unemployment and services-sector performance will shape expectations for growth and policy. Weak numbers would reinforce the GBP-negative narrative, while stronger data could help stabilise the currency.
Political risk also hovers in the background. The 7 May local elections are widely expected to be difficult for the government. A poor showing could revive speculation about Labour leadership challenges, spooking markets and potentially pushing gilt yields higher, which in turn might erode some of the fiscal headroom Reeves worked to preserve.
Navigating GBP volatility
Despite the brief post-budget bounce, Sterling still faces a potentially choppy path ahead. Currency swings may intensify as markets digest both the economic impact of the budget and the direction of BoE policy.
If you’re worried about potential volatility in the pound and how it could impact you, the TorFX team is ready to help. Our specialists can guide you through your options, from tracking market movements to safeguarding future transfers.
Whether you want to discuss timing, explore tools to manage risk or simply understand what your transfer options are, you can set up a free account or contact us for tailored support.