Outpaced by Events: Why the Spring Statement Leaves Sterling Exposed

By comparison, the 2026 Spring Statement was deliberately billed as a “non-event”. No major fiscal fireworks. Just calm, competence and continuity. The government’s aim was clear: project stability and allow the Office for Budget Responsibility (OBR) to confirm that the fiscal plan remained on track. The message to markets and businesses would be that the pain of the Autumn Budget had been worth it; the numbers were improving; the plan was working.

To an extent, the Chancellor got what she wanted.

A little more breathing room — for now

The £21.7bn of fiscal headroom painstakingly carved out at the Autumn Budget had edged higher to £23.6bn. That improvement was helped by three factors: lower government borrowing costs, a strong January tax intake, and the expectation that the Bank of England would make further cuts to interest rates as inflation eased.

Importantly, this improvement came despite post-Budget concessions — including support for pubs hit by higher business rates and additional spending pressures from Labour MPs, particularly around SEND provision for school children. On the surface, that resilience added credibility to the government’s fiscal framework.

For sterling, this was modestly supportive. Markets tend to reward fiscal discipline and punish uncertainty. A stable fiscal backdrop reduces the risk premium embedded in UK assets — and, by extension, the pound.

However, beneath the surface, the picture was less reassuring.

Growth concerns resurface

The OBR downgraded its 2026 growth forecast from 1.4% to 1.1%, reflecting a weaker-than-expected end to 2025 and a continued rise in unemployment. Particularly concerning is the concentration of joblessness amongst new graduates, leaving the UK with a youth unemployment rate above the EU average — a notable reversal of fortunes.

At the same time, a sharp fall in net migration — driven by both tighter visa rules and outward migration — is expected to constrain future labour supply and tax receipts, creating longer-term fiscal strain.

There are also political risks embedded in the numbers. The Chancellor’s strategy of backloading tax rises into the year of the next expected general election may prove difficult to implement in practice given the pressures Labour faces at the ballot box. If those increases fail to materialise, the credibility of the fiscal consolidation path weakens — something markets are quick to notice.

Even before recent geopolitical developments, these factors were limiting the pound’s upside. Slower growth combined with fragile public finances is rarely a strong foundation for sustained currency appreciation.

Events move faster than forecasts

The bigger issue, however, is that the OBR’s projections were outdated almost immediately.

The escalation of conflict in the Middle East — and the resulting disruption to shipping through the Strait of Hormuz, which carries around 20% of global oil and LNG supply — has fundamentally altered the macroeconomic backdrop.

UK natural gas prices have surged, more than doubling in a matter of days. If sustained, this will feed directly into higher energy bills and fuel costs, risking a renewed inflation shock reminiscent of the early phase of Russia’s invasion of Ukraine in 2022.

For the UK economy, this creates a highly uncomfortable mix of higher inflation, weaker growth, and renewed fiscal pressure - and that combination is particularly sensitive for sterling.

The gilt market and shifting rate expectations

Markets have responded quickly. UK gilt yields have risen as investors scale back expectations for imminent Bank of England rate cuts. Just before the latest escalation, markets were pricing close to a 90% probability of a March cut. Now, the figure is closer to 25%.

On the surface, higher interest rate expectations can support a currency. But in this case, the driver matters. If rates stay higher because inflation is being pushed up by an energy shock, rather than because growth is strong, the impact on sterling is far less constructive.

Higher yields also increase the government’s debt servicing costs, eroding the very fiscal headroom the Chancellor highlighted in the Spring Statement. If energy prices remain elevated, further support measures for households and businesses may become politically unavoidable, placing additional strain on public finances. Added to this is growing pressure to raise defence spending in a more volatile geopolitical environment.

The net result is rising uncertainty, and currencies tend to dislike uncertainty.

So what does this mean for the pound?

The improved fiscal headroom initially offered a degree of reassurance. But that cushion now looks vulnerable to being quickly eroded by higher borrowing costs, weaker growth and potential emergency spending.

The UK’s particular exposure to global energy price swings makes it more sensitive than many peers to prolonged disruption in oil and gas markets. If inflation remains elevated while growth slows the Bank of England faces an unenviable policy trade-off. That kind of policy uncertainty typically translates into currency volatility.

In short, sterling finds itself pulled in opposing directions:

• Reduced rate cut expectations offer some near-term support.

• But weaker growth prospects, rising fiscal pressures and heightened geopolitical risk weigh in the opposite direction.

Much will depend on the duration of energy market disruption and how credibly the government can maintain fiscal discipline in a more hostile global environment.

What is clear is that the relative calm the Chancellor sought to project has been overtaken by events. For businesses with FX exposure, this is precisely the kind of environment where proactive risk management becomes critical. The coming months are likely to bring heightened volatility — and sterling will be one of the currencies most sensitive to how this global story unfolds.