Pound Strengthens to Highest Since October

The British pound slipped to $1.322 on Friday but still gained about 1% for the week, its strongest rise since early August, after investors reacted to the government’s new budget.

Finance minister Rachel Reeves presented her long-awaited budget earlier in the week and defended it against criticism over higher spending and the decision to lift the tax burden to its highest level since World War Two.

The plan aims to raise £26 billion in new taxes to support welfare programs. Investors generally welcomed the budget’s signal of more disciplined borrowing, though the muted market response showed much of it was already priced in, and part of sterling’s rise likely came from traders unwinding hedges set before the announcement.

Looking ahead, the pound may face limited upside as its yield advantage fades and more Bank of England rate cuts loom.

The central bank kept rates unchanged in November, and easing inflation has strengthened expectations of a cut next month.

The British pound stabilized slightly higher near $1.3190 on Wednesday as markets assessed the government’s newly unveiled fiscal tightening plans and an unusually early release of the Office for Budget Responsibility’s forecasts.

Sterling initially strengthened after traders circulated the OBR document, but the move quickly reversed to as low as $1.31243 as investors examined details showing that much of the planned austerity is pushed toward the end of the decade.

The OBR noted a substantial increase in the government’s fiscal buffer to £22 billion, well above expectations, yet downgraded UK growth forecasts due to weaker productivity assumptions and projected higher inflation and wage pressures.

Analysts warned that the backloading of cuts could weigh on the government’s credibility, prompting the pound to trade erratically during Chancellor Rachel Reeves’s budget speech.

GBPUSD increased to 1.32, the highest since October 2025.

Over the past 4 weeks, British Pound US Dollar lost 0.89%, and in the last 12 months, it increased 4.24%.

The pound briefly climbed to $1.31929 before slipping to around $1.314 after the OBR accidentally released key budget figures ahead of Chancellor Rachel Reeves’s speech.

The report showed a larger-than-expected £22 billion fiscal buffer, compared with the £15 billion forecast, but also weaker growth and higher inflation projected for 2026.

The early release sparked sharp market swings, as such data normally appears only after the budget.

The OBR detailed tax changes including higher gambling duties, a levy on properties over £2 million, and a 2-point rise in dividend taxes, adding £26.1 billion in revenue by 2029-30.

Income tax and national insurance thresholds will remain frozen until 2030-31.

Confusion over the premature release, along with higher inflation forecasts, led traders to scale back rate-cut bets and left both gilts and sterling under pressure.

The OBR apologized, saying the link went live “too early” and that it has opened an investigation.

The British pound edged up to $1.318 as traders awaited Chancellor Rachel Reeves’s crucial budget.

She is expected to unveil a range of tax increases on the wealthy to plug a £20 billion fiscal gap, after weeks of political pressure from Labour MPs and turmoil around Keir Starmer’s leadership.

Reeves must balance demands from her party with the need to reassure gilt investors, who have been demanding a higher premium on UK debt.

Reeves is expected to create £15–20 billion in fiscal headroom, and markets will focus on whether her plan appears credible.

Recent data underline the challenge: borrowing is at a record high outside the pandemic, business activity has stalled, retail sales fell sharply, and consumer sentiment weakened.

Meanwhile, inflation eased to 3.6% in October, boosting expectations that the Bank of England will cut rates next month.

Markets now see an 80% chance of a 25-bp cut in December.

The British pound hovered just below $1.31 as traders awaited the UK’s Nov. 26 budget.

Finance minister Rachel Reeves is expected to find tens of billions of pounds to meet her fiscal rules, and reports that she might avoid tax hikes briefly unsettled markets.

The OBR will reportedly cut growth forecasts for 2026 and beyond, widening a £20–30 billion hole in the public finances and increasing pressure for tax rises.

Recent data underline the challenge: borrowing is at a record high outside the pandemic, business activity has stalled, retail sales fell sharply, and consumer sentiment weakened.

Meanwhile, inflation eased to 3.6% in October, boosting expectations that the Bank of England will cut rates next month.

Markets now see an 80% chance of a 25-bp cut in December.