November’s Budget and What It Could Mean for the Pound

The UK heads into the November 26th Budget facing a challenging backdrop. Growth is slowing, inflation remains stubbornly high, and unemployment has ticked up to a post-pandemic high of 5%. Add in the Office for Budget Responsibility’s downgrade to productivity forecasts, and the Chancellor’s task of balancing the books looks daunting.

By most estimates, Chancellor Reeves needs to find £20 - 30 billion in savings or new revenue to hit the government’s fiscal targets. After last year’s Budget misfire, expectations are low and nerves are high. The question for markets is simple: will this Budget restore confidence, or deepen fears of stagnation?

An Unusually Leaky Pre-Budget Season

Few Budgets in recent memory have been trailed so heavily in advance. From income tax hikes to mansion levies and tweaks to energy prices, a stream of policy possibilities has filled the headlines.

Many investors suspect a deliberate strategy of expectation management - testing ideas in public, softening the ground for unpopular choices, and gauging political reaction. The risk, however, is that it reinforces the image of indecision and political fragility that has already defined a government that is barely a year old.

Markets prefer a plan that feels designed, not negotiated. If the final package looks like a coherent fiscal roadmap rather than a half-baked compromise shaped by polls and backbench pressure, sterling could find support.

For Markets, Credibility is Everything

For currency traders, the Budget will serve as a real-time credibility test. A rally in the pound is unlikely given the sheer scale of tightening ahead, but if sterling holds firm, it will suggest that investors see the Chancellor’s plan as credible. Tough, but necessary.

The main risk is a perception of overreliance on short-term revenue grabs that weigh on growth or risk being watered down in Parliament, dulling their effectiveness. Another year of fiscal U-turns, as we saw after last year’s reversals on tax and spending, would be damaging. For traders, any sign that the government is improvising rather than executing could send the pound lower.

What might support the pound

Measures that demonstrate fiscal discipline and restore medium-term headroom without choking growth are most likely to reassure investors. In particular, a rise in income tax and the continued use of fiscal drag would deliver substantial and predictable revenue while signalling seriousness about the deficit, even if the political cost of breaking one of Labour’s core manifesto pledges could be steep.

Furthermore, any additional fiscal headroom that the Chancellor is able to eke out (even if it involves short-term pain) could strengthen sterling by reducing the risk of repeated Budget revisions and enhancing the UK’s resilience to external shocks. In an environment where the US and parts of Europe are struggling to contain deficits, the UK could start to look like a relative safe haven if fiscal discipline is restored.

Likely Policy Moves

Beyond the headline grabbing hike to income taxes, there are a few credible policy rumours under close watch:

Energy bill relief: A politically popular move that could ease cost-of-living pressures. However, the cost would need offsetting elsewhere. The resulting dip in inflation could also nudge the Bank of England toward a more aggressive policy of monetary easing. With a 25bps rate cut in December pretty much priced in already, further easing expectations beyond this could weigh on sterling in the near term.

‘Sin’ taxes: Higher duties on alcohol, tobacco or sugar would be politically easy methods of raising revenue and do little to deter growth. As such, they would be mildly supportive for sentiment.

Higher business and wealth taxes: These risk denting investment and reinforcing perceptions that the UK is turning less business-friendly - a potential headwind for sterling.

Expanded welfare spending: Moves to placate the left of the party by increasing borrowing or raising benefits without offsets would test market patience and could trigger renewed gilt and sterling selling.

Political risks after the budget

Once the headlines fade, markets will focus on whether the measures stick. Any backbench rebellion, particularly against the income tax hike or welfare cuts, could force the government back to the drawing board and reignite fiscal uncertainty. Investors have long memories of policy U-turns, and political instability remains the pound’s quiet enemy.

At Bondford, we think the real test will come in the weeks after the Budget: whether Labour can hold its nerve under pressure from within its own ranks.

Bondford’s view

For all the noise around tax and spending, this Budget is fundamentally a credibility test. If Chancellor Reeves delivers a disciplined, coherent plan that convinces markets the UK’s finances are on a sustainable path, sterling could stabilise and even recover some ground into year-end.

But if the package feels improvised, overly political, or economically self-defeating, the pound’s recent slide could easily deepen.

In short: credibility is the new currency - and this Budget will decide whether the UK still has enough of it.