Pounds Strengthens Slightly Following UK Budget Announcement
The market initially responded to the UK government's budget announcement with optimism. However, the fragile fundamentals of the fiscal policy limited the strengthening of the Pounds and it is expected not to last long.
Pound Sterling briefly rebounded after the UK government released its latest budget. However, the strengthening of GBP/USD could only hold around 1.3250, while the decline of EUR/GBP was capped at the 0.8760 area on Thursday (28/November). Analysts believe this increase may be temporary, considering the fragile economic foundation of the UK.
After being anticipated by the market with great concern, on November 26, 2025, UK Chancellor of the Exchequer Rachel Reeves presented the latest budget package. She targets an additional revenue of 26.1 billion Pounds by the fiscal year 2029/2030 through several policies, such as:
- freezing the income tax threshold,
- freezing fuel duties,
- removing benefits for the third child and beyond,
- increasing gambling taxes,
- raising the per mile rate for electric vehicles, and
- changing the structure of national insurance contributions.
In addition to these measures, Reeves also allocated an additional 9 billion Pounds for social welfare programs.
At first glance, this package seems capable of closing the fiscal gap without having to aggressively raise taxes or increase national debt. This briefly lifted the value of the Pound and eased pressure on UK government bonds. However, some analysts see fundamental issues that could limit the rally of the British currency.
The Office for Budget Responsibility (OBR) assesses that the revenue increase from these new policies is not enough to cover the deficit while also funding the government's future spending agenda. Thus, the UK may be forced to increase debt every year or raise taxes again in the next period.
Economists from HSBC and Nomura also highlighted the weakness of the "fiscal credibility" of the budget. They are concerned that the government will not be able to execute the outlined plans consistently.
On the other hand, the OBR does not see any improvement in national productivity prospects as a result of these policies. This indicates that the UK’s economic growth is likely to remain sluggish in the coming years.
Nomura even estimates that the budget package could reduce CPI inflation by about 0.3%-0.4% in the next fiscal year. Consequently, the Bank of England (BoE) may have more room to implement further interest rate cuts.
These various critical notes limit the potential for the Pound to strengthen. The positive sentiment following the budget announcement may support the Pound in the short term, but its long-term prospects remain negative.
Nicholas Kennedy, a forex strategy expert at Lloyds Bank, noted that the announcement of the UK budget initially sparked optimism for the GBP, but did not change its fundamentals. Therefore, the implications for the currency will be limited in the short term. He also believes the Pound needs to weaken to support the UK economy from the risk of declining growth.