On 26 November, Chancellor Rachel Reeves unveiled her long-awaited autumn budget against a bleak backdrop of sluggish growth, high debt, weak productivity and political instability.
The pound had weakened notably in the run-up to the budget, with GBP/USD hitting a seven-month low and GBP/EUR striking its worst levels in two and a half years. This left room for a modest relief rally in Sterling as the uncertainty came to an end.
However, as markets digest the Chancellor’s plans, we could see more notable movement in GBP exchange rates. The long-term implications for growth, debt, inflation and monetary policy could all steer Sterling in the coming months.
Overall, we believe the budget could be net negative for the pound in the medium term. While the budget does strengthen fiscal credibility, this support comes with caveats. Meanwhile, weaker growth prospects, rising expectations of earlier interest rate cuts and possible political uncertainty still outweigh the fiscal positives.
For a full forecast of how GBP could perform in the year ahead, read our latest article: Will the pound get stronger in 2026?
How did the pound react to the budget?
The pound enjoyed some support in the immediate aftermath of the budget, trending broadly higher as markets reacted positively.
A key factor in GBP’s success was simply an end to the uncertainty that had plagued the pound in the run-up to the announcement, along with fading political risks.
Sterling was also supported by improving fiscal sentiment, with bond markets welcoming Reeves’s decision to carve out £22bn of headroom – a larger buffer than expected and more than double the £9.9bn left in reserve in the spring.
However, although GBP/EUR and GBP/USD both hit one-month highs on the day of the budget, they remained close to the multi-month lows struck earlier in November.
The announcement mostly stemmed Sterling’s losses, as the outlook was less bad than feared, rather than inspiring real strength in the pound.
How will the budget affect the pound in the coming months?
The medium-term GBP forecast following the autumn budget depends on a variety of factors. Sterling is in a better position than it was before the budget, thanks to fading fiscal and political uncertainty, but there are still risks.
The budget’s impact on BoE policy (GBP negative)
Thanks to stronger-than-expected tax receipts, Reeves didn’t have to tighten fiscal policy as much as many had feared. However, the budget is still expected to ease inflationary pressures, particularly due to measures aimed at reducing energy bills and rail fares.
As a result, market odds for a Bank of England (BoE) interest rate cut in December rose from 85% pre-budget to 90% post-budget.
Barring a surprise in November’s consumer price index, the BoE is highly likely to cut rates next month, which could drag on GBP. If the budget encourages the BoE to further reduce Bank Rate in the coming months, we could see Sterling face headwinds through the first half of 2026.
Economic growth after the autumn budget (GBP negative)
While the Office for Budget Responsibility (OBR) upwardly revised its growth outlook for 2025 from 1% to 1.5%, it lowered its growth forecasts for the following four years.
The growth upgrade for this year could provide the pound with near-term support, particularly if it’s reflected in future economic releases, but the longer-term outlook is rather lacklustre.
Much of the downgrade is due to the OBR’s review of productivity growth since 2008, carried out over the summer, rather than the budget itself. However, OBR Chair Richard Hughes said ‘none of the measures’ in the budget will ‘have a material effect’ on growth, while some analysts and business leaders are warning that tighter fiscal conditions could weigh on the economy in 2026. Conversely, Reeves has argued that the overall budget will help boost growth.
Whether the budget will impact the economy positively, negatively or not at all remains to be seen. However, the risks for the pound seem slightly tilted to the downside.
The budget’s fiscal credibility (GBP positive)
One of the bright spots in the budget was the Chancellor’s ability to keep bond markets calm by setting aside £22bn as a buffer, more than double the £9.9bn headroom she had back in March.
Many investors have confidence in Rachel Reeves as a fiscally responsible Chancellor, and this budget – delivered against a difficult backdrop – has mostly maintained that reputation. With the public finances looking more stable than they did before the budget, the pound could draw support.
That said, there are concerns that many of the spending increases are front-loaded, while some tax hikes are set to come into effect close to the next general election. The Institute of Fiscal Studies (IFS) has said this could be ‘fiscal fiction’, as Labour may U-turn on tax rises when seeking re-election.
Another risk is that Reeves finds her headroom wiped out by unexpected external shocks, which have frequently rocked markets in recent years. While £22bn in headroom is higher than expected, it’s still below the historical average of £29bn.
Political stability following the budget (GBP positive)
Rumours of a plot to oust Prime Minister Keir Starmer and the risk of a backbench rebellion may have shaped some of the aspects of the budget. Reeves lifted the two-child benefit cap, introduced a mansion tax and an online gambling levy, and raised the minimum wage.
These measures may placate the Labour backbenches for now, but many on the left of the party wish Reeves had gone further. Additionally, as the government faces threats from both sides of the political spectrum, and Starmer’s approval ratings plummet, discontent is brewing within the Labour Party.
The budget may have temporarily reduced the risk of political turbulence hurting the pound, but we could see this flare up again during the May local elections.
What to watch for in the pound in the months after the budget
As the dust settles and speculation subsides, GBP investors will turn their attention away from analyses of the budget to indicators of the impact it’s having on the ground.
The Bank of England will announce its next policy decision on 18 December, where an expected interest rate cut could dent GBP. Its first announcement of 2026 is on 5 February, then 19 March, 30 April and 18 June. An overall dovish tone could drag on the pound through the first half of the year.
Investors will also be keeping a close eye on upcoming economic data releases to assess UK growth and the BoE’s likely policy path, including inflation, GDP, unemployment, and activity in the services and retail sectors. Indications that the British economy remains sluggish could undermine GBP, while any positive signs that things are picking up will likely support Sterling.
Political developments are also on investors’ minds, with the local elections on 7 May expected to be bruising for the government. If Labour performs as badly as forecast – haemorrhaging votes to Reform on the right and the Green Party on the left – then Keir Starmer may face a leadership challenge.
Such turmoil would be bad for the pound, reinforcing fears that the UK is stuck in a political permacrisis. We could also see bond yields surge again, which in turn may eat away at the fiscal headroom created in the budget.
Managing volatility in the pound
While the pre-budget headwinds hitting the pound have died down, there could be more turbulence ahead.
If you’re concerned about how GBP volatility could impact your international payments or overseas transfers in the coming months, our team is here to help. We offer expert guidance and a range of tools designed to help you navigate a shifting market with confidence.
Whether you want to stay on top of market movements, protect a future transfer or simply speak to someone about your options, you can create a free account or get in touch to discuss how we can support your plans.
