The Budget Test: Will Sterling Sink or Stabilise?

Interest Rates & Inflation Snapshot

Region	Interest Rate	Latest Inflation
UK	4.00%	3.6%
Eurozone	2.15%	2.1%
US	4.00%	3.00%

GBP – All Eyes on Thursday’s Budget

Sterling starts the week steady, but markets are clearly nervous ahead of Chancellor Rachel Reeves’ first Budget on Thursday. The pound is still carrying a small risk premium, with GBP/EUR holding slightly above where fundamentals suggest.

The Budget is the main event for GBP:

• Markets want clear reassurance that the Government has a credible plan to manage the UK’s debt.
  
• Goldman Sachs estimates £30bn of tax measures will be required for Reeves to meet her fiscal rules.
  
• Any sign the numbers do not add up, or that borrowing drifts higher, could see GBP/EUR fall around 1% intraday.
  
• On the flip side, a disciplined package with no surprises would likely keep GBP stable but offer limited upside.

Despite a steady start to the week, Sterling remains vulnerable into Thursday’s Budget, with GBP/EUR now trading closer to 1.1350. Any sign that the Chancellor’s plans fall short of controlling the UK’s debt could see the pound come under renewed pressure, while a disciplined package should help keep volatility contained.

EUR – Cheaper Energy Offers a Boost

European natural gas prices have dropped below €30/MWh for the first time since spring, easing pressure on energy-heavy sectors and helping improve the Eurozone’s terms of trade.

Key points this week:

• The Euro’s trade backdrop is at its strongest of the year.
  
• EUR/USD is still hovering near 1.15, with some bullish positioning showing up more clearly in EUR/CHF.
  
• Focus today is on Germany’s Ifo business sentiment following last week’s softer PMI readings.
  
• Any progress on Ukraine peace discussions would likely support EUR/CHF toward ₣0.94–₣0.945.
  

Overall, the Euro enters the week with a constructive tone, but still dependent on economic data holding up.

USD – Softer Data vs Geopolitics

The Dollar has eased off last week’s highs, with markets reassessing the likelihood of another Federal Reserve rate cut in December.

Recent drivers:

• September US jobs growth beat expectations at 119k, but unemployment ticked up to 4.4%.
  
• Fed minutes show policymakers are still divided, keeping a December move in play (markets price ~35%).
  
• UK retail sales fell 1.1% in October, adding pressure to GBP/USD, which remains capped near 1.31.
  
• A holiday-shortened US week brings focus to retail sales and the Fed’s Beige Book for signs of labour-market cooling.
  

Geopolitical backdrop:

• Confidence around Ukraine peace discussions has lifted European currencies and reduced safe-haven demand for the Dollar.
  
• With oil and gas prices at yearly lows, improving sentiment is mildly negative for USD.
  

GBP/USD continues to trade in a tight range around 1.31, with softer UK data offset by mixed US indicators. The pair will likely remain directionless until the Budget and upcoming US data provide a clearer catalyst for a breakout either way.

Why this matters
This week’s data releases could spark sharp moves in currency markets. For businesses and individuals with upcoming FX needs, even small shifts can have a meaningful impact on costs and margins. Our team can help you manage the risks and position yourself to benefit from opportunities.

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