Budget Steadies Sterling - But Leaves Big Questions Hanging Over the Pound

After weeks of leaks, political noise and market jitters, the UK Budget finally landed - and sterling’s reaction was revealing. Rather than a relief rally, the pound managed only a modest, choppy uptick from its seven-month low. This wasn’t a surge of confidence, it was the market breathing a sigh of relief.

For all the headlines and last-minute speculation, investors appeared to accept the Budget without being particularly impressed. If anything, the muted response speaks to a Budget that succeeded more through relentless expectation-management than through bold policy announcements.

Fiscal Headroom: The Market’s Main Comfort Blanket

The headline that soothed markets most effectively was the decision to more than double the UK’s fiscal headroom, to £21.7bn. For sterling, this matters. Stronger fiscal headroom reduces the risk that the Chancellor will return next year with another round of unplanned tax hikes to stay on track. This helped steady gilt markets after weeks of uncertainty, and that in turn gave the pound a foundation to stabilise.

For Businesses: Relief by Not Repeating Last Year’s Mistakes

Markets also welcomed what didn’t happen. In contrast to last year’s controversial bumper hikes to both employer National Insurance and the Minimum Wage, moves that many economists argue helped worsen the UK’s economic position, the Chancellor opted for minimal direct tax rises on businesses.

Alongside pre-briefed reductions in energy bills and a freeze in rail fares, the result is likely to be a reduction in inflationary pressures. This strengthens the case for the Bank of England to resume rate cuts as early as December. For the pound, a path toward lower interest rates is rarely supportive, but if achieved through genuine disinflation rather than economic weakness, the FX impact is more neutral than negative.

A Budget That Avoided Hard Choices, And the Market Knows It

Yet for all the stabilisation it delivered, the Budget also underscored a sense of missed opportunity. The OBR’s notes revealed that the fiscal hole facing the Chancellor was far smaller than the widely briefed £20-30bn range.

Rather than banking this unexpected cushion, or using it to set out a more coherent long-term growth plan or reform of the tax system, the Chancellor channelled it into avoiding a rise in income tax that would have broken manifesto commitments, and into expanding welfare spending to appease internal party dynamics.

The result was a Budget that felt reactive rather than strategic. As the leader of the opposition uncharitably put it, the measures resembled “a smorgasbord of misery” - a series of small revenue raisers affecting a broad contingent of voters, designed to satisfy political constraints rather than build a growth agenda. Markets tend to have long memories for fiscal hesitation, and that matters when the markets already have doubts about the government’s fiscal credibility.

The Political Timetable Poses the Bigger FX Risk

In FX, political credibility often matters more than the arithmetic itself. And this is where the Budget leaves lingering fragility for both the pound and gilts.

Welfare spending increases, totalling £73bn over five years, are front-loaded. Yet the major tax measures that are meant to pay for them are back-loaded toward the end of the Parliament. That sequencing means the fiscal balance relies heavily on political discipline holding firm for several years.

If markets begin to doubt the political viability of the plan, or question whether the back-loaded tax rises will ever fully materialise, gilts could come under pressure again, and sterling would likely follow. As we’ve seen many times, when the UK loses fiscal clarity, the pound usually pays the price.

Muted Sterling Reaction Reflects a Budget Already Priced In

One reason the pound barely reacted today is straightforward: nearly every major element of the Budget had been briefed or leaked in advance. FX markets trade on surprise, and this Budget simply didn’t deliver one. In the days ahead, attention will shift from the headlines to the fine print, with investors scrutinising the credibility of the Chancellor’s fiscal path and the political hurdles it still faces in Parliament. Any sign that key revenue-raising measures might be softened, delayed, or reshaped to satisfy internal party pressures could quickly reintroduce uncertainty, and with it, renewed downside risk for sterling.

The FX Bottom Line

The Budget has bought the government some breathing room, and it has stabilised the pound for now. But it has not resolved the underlying concerns weighing on UK assets: subpar growth prospects, a heavy tax burden, and political dynamics that could threaten fiscal discipline.

Investors will be watching both the data and Westminster closely. The pound isn’t out of the woods yet, just on slightly firmer ground.