The pound sterling has enjoyed a strong rally over the past week, driven by relief following the UK government's autumn budget and better-than-expected revisions to business activity data. With markets now turning their attention to central bank policy decisions this month, Sterling continues to demonstrate resilience against major currencies, particularly the US dollar.
Chancellor Rachel Reeves delivered the Labour government's second budget on 26 November, announcing £26 billion in tax rises by the end of the parliamentary term. The measures, which include extending the freeze on income tax thresholds until 2030-31 and implementing restrictions on salary sacrifice pension schemes, were designed to address fiscal pressures whilst maintaining government borrowing rules. Importantly, the budget avoided some of the more drastic measures that had been speculated in the weeks leading up to the announcement, providing reassurance to bond markets that had been concerned about potential breaches of the government's self-imposed fiscal rules.
The budget's reception proved more positive than many had anticipated. UK gilt yields declined following the announcement, and the Office for Budget Responsibility confirmed that the government's fiscal headroom had more than doubled to £22 billion over the five-year forecast period. This buffer provides greater protection against economic shocks and reduces the likelihood of further emergency fiscal adjustments in the near term. For currency markets, this stability has translated into increased confidence in sterling, with investors viewing the UK's fiscal position as more sustainable than previously feared.
Adding further momentum to the pound's advance, the S&P Global Composite Purchasing Managers' Index for November was revised higher to 51.2 in its final reading, up from the preliminary estimate of 50.5. This upward revision helped alleviate concerns about weakening business activity in the UK economy. Readings above 50 indicate expansion in the private sector, and whilst the November figure represents a slowdown from October's 52.2, the better-than-expected final data suggests the economy is maintaining modest growth rather than stalling altogether.
The improved PMI data reflects a degree of resilience in the services sector, which continues to drive overall economic activity despite ongoing headwinds. Manufacturing conditions remain challenging, though the sector has shown some signs of stabilisation. Survey respondents indicated that clearer policy direction following the budget announcement, alongside easing concerns about certain external factors, had helped support sentiment amongst business leaders.
Against the US dollar, sterling has climbed to approximately 1.3360, with GBP/USD gaining ground as the greenback retreats to five-week lows. The dollar's weakness stems largely from growing market confidence that the Federal Reserve will cut interest rates at its December policy meeting. According to CME FedWatch data, traders are pricing in an 87% probability of a 25 basis point reduction, which would bring the Fed funds rate to a target range of 3.50% to 3.75%.
Recent US labour market data has reinforced expectations for Fed easing. The ADP employment report showed that the private sector shed 32,000 jobs in November, a significant departure from expectations of 5,000 new positions. These figures underscore the softening conditions in the US jobs market and support the case for further monetary policy accommodation. Minutes from the Federal Reserve's October meeting also revealed that policymakers acknowledged downside risks to employment and the need for continued rate reductions, though some members expressed reservations about cutting in December.
Looking ahead, the Bank of England faces its own policy decision on 18 December. Markets are anticipating that the BoE will reduce interest rates to support the labour market, which has shown signs of weakening. However, the UK's relatively robust economic data compared to some peers, combined with the government's expansionary fiscal stance, may give the BoE room to adopt a more measured approach to rate cuts than initially expected.
What This Means for Currency Markets
For individuals and businesses managing international payments, the current environment presents both opportunities and considerations. Sterling's strength has improved the purchasing power of those converting pounds into other currencies, particularly the US dollar. However, exchange rates remain sensitive to economic data releases and central bank policy signals, which can create volatility.
Those with upcoming international transfers should consider that both the Federal Reserve and Bank of England are expected to adjust interest rates this month. These policy moves typically influence currency valuations, though the direction and magnitude of any shifts will depend on the accompanying guidance from central bank officials. Forward contracts can provide protection against adverse exchange rate movements for those with future payment obligations, whilst spot transactions may benefit from current favourable rates.
The broader outlook for sterling will likely depend on several factors in the coming months. The UK's fiscal position appears more stable following the budget, but the government faces the challenge of delivering economic growth whilst managing higher tax burdens. Business confidence, as reflected in PMI surveys, will be an important indicator of whether the economy can maintain its modest expansion or whether further headwinds emerge.
At X Rate Capital, we continue to monitor these developments closely to provide our clients with timely market insights. Understanding currency movements and their underlying drivers is essential for effective international money management, whether for property purchases, business operations, or personal transfers. Whilst we cannot predict future exchange rate movements with certainty, staying informed about economic and policy developments can help guide decision-making around the timing and structure of international payments.
