GBP: Pound benefits from renewed fiscal confidence
The pound has pushed to a four-week high against both the euro and the dollar as investors take comfort in the government’s attempt to stabilise public finances. Sterling is holding intraday gains after the Budget delivered enough reassurance that the fiscal position is under firmer control.
A key support for the currency was the Office for Budget Responsibility’s relatively mild downgrade to growth expectations. This allowed the package of tax measures to satisfy fiscal rules while still giving Chancellor Rachel Reeves roughly £22 billion of additional room to manoeuvre.
The measures, expected to raise £26.1 billion by 2029 to 2030, include: frozen tax thresholds, national insurance applied to salary sacrifice pension arrangements, a pay-per-mile charge for electric vehicles, higher gambling taxes, a freeze on fuel duty and the removal of the two-child benefit limit.
The pound to euro rate trades near 1.1390 after touching 1.1350 earlier. GBP/USD has rebounded to around 1.3195 from a low of 1.3123.
The Budget also earmarks £9 billion in extra welfare spending and will require higher borrowing in each forecast year, according to the OBR. However, the OBR notes that none of the policies shift the UK’s medium-term productivity path, a reminder that structural growth challenges remain. Economists are also questioning whether the proposed return to a balanced budget within four years is realistic, given that sizeable spending cuts would be required towards the end of the horizon.
Even so, with no significant surprises from the Treasury and despite the early release of OBR forecasts due to a technical error, markets have judged the Budget credible enough for now. Sterling may still face headwinds in 2026 as the impact of tax increases becomes more visible, yet near-term pressure has eased.
EUR: Euro draws support from geopolitical and US data dynamics
The euro strengthened by 0.4 percent against the dollar and outperformed across the G10 space. The move reflects a combination of softer US data and ongoing diplomatic efforts linked to a potential Ukraine–Russia ceasefire. The United States has revisited its earlier peace proposal following input from European allies and discussions with Ukrainian officials in Geneva. Although President Zelenskyy has softened his position and signalled openness to further talks, Russia has not yet endorsed the revised terms. Both sides continue to trade fire, keeping the geopolitical backdrop fluid. President Putin is due to meet Steve Witkoff, Donald Trump’s envoy, next week, while Zelenskyy has indicated he would meet Trump to resolve remaining sensitive issues.
EUR/USD has lifted off recent lows around 1.15 and is preparing to test 1.16. The 1.1650 area has capped the upside since mid-October, though momentum suggests the pair is now better placed to challenge that barrier. Delayed US data releases could provide the spark for a more sustainable move higher should they confirm recent softening in the American economy.
USD: Dollar weighed down by softer data and policy uncertainty
The US dollar struggled as softer macro releases and renewed policy speculation eroded support. Retail sales missed expectations, with headline growth at 0.2 percent and the control group declining slightly. This contrasts with the strong spending patterns seen earlier in the year and raises questions over the forthcoming third quarter GDP figures. Consumer confidence also slipped to its weakest level since April, reflecting concerns about labour market conditions and inflation. Survey timing, which overlapped with the government shutdown, likely amplified the downbeat tone.
Political developments also contributed to the dollar’s drift. Reports indicate that Kevin Hassett, Director of the National Economic Council, is the leading candidate to chair the Federal Reserve. Markets view him as closely aligned with President Trump and favouring lower rates, which reinforces expectations that the Fed will maintain a dovish stance.
The pullback in the dollar follows a period of gains fuelled mainly by safe-haven demand. With rate markets now pricing an approximate 92 percent probability of a near-term cut, compared with around 80 percent last week, the softer tone in the currency is more firmly grounded in data. With few major releases today other than weekly jobless claims, investors will focus on the Beige Book, which is likely to echo recent signs of cautious sentiment and persistent inflation pressures. On balance, the dollar still appears overvalued relative to rate differentials.
Looking ahead
Attention turns to incoming US data and any further budget commentary from UK officials. Moves in geopolitical headlines remain central for the euro, while the dollar’s trajectory will depend on whether softer data becomes a clearer trend. Sterling has room to consolidate recent gains, although concerns about the medium-term UK fiscal path could resurface once the immediate Budget relief fades.
