After the UK Budget: Sterling Still Struggling as the Dollar Enters a Critical Week

One week on from the UK Budget, markets are still digesting its implications, and sterling remains under pressure. While much of the initial shock has faded, the lasting message is clear: the UK is entering a period of tighter fiscal constraints, softer growth prospects, and limited policy headroom.

At the same time, the US dollar has softened ahead of next week’s Federal Reserve interest rate decision. Investors have been trimming earlier fears of a hawkish surprise, and US data is now mixed enough to revive expectations of further easing into year-end.

For GBP pairs (and for clients with dollar or sterling exposure) these two narratives are colliding in a way that demands attention.

The UK Budget: Subtle Impacts

Rachel Reeves’ first Budget set the tone for the year ahead: higher taxes, reduced allowances, and a clear admission of a large structural fiscal gap.

For FX markets, the consequences have lingered:

1. Growth expectations have been marked down

Tax-heavy fiscal tightening, especially on higher earners, investor groups and property owners, risks dragging on consumption and investment. Markets now expect slower growth across 2026, pushing investors toward safer assets and away from sterling.

2. Monetary policy flexibility has shrunk

If fiscal tightening does part of the BoE’s inflation-control job for them, rate cut expectations move forward. Earlier rate cuts = weaker GBP. Markets are pricing this in.

3. Gilt markets remain sensitive

The Budget didn’t fully settle the question of debt sustainability. Any move higher in gilt yields, especially on the longer end, tends to weigh on GBP via foreign investor flows.

4. Sentiment remains fragile

Investors still remember how quickly confidence can fall when fiscal policy feels uncertain. Sterling’s muted reaction this week reflects caution, not comfort.

The pound may avoid a sharp selloff, but the Budget has limited its ability to stage a meaningful recovery.

Meanwhile in the US: The Dollar Has Softened Ahead of the Fed

The US enters next week’s Fed decision with a currency losing momentum. The dollar has been steadily weakening over the past week as markets increasingly price in the possibility of additional rate cuts into December and early 2026.

Three factors are driving the softer dollar tone:

1. Mixed economic data

Recent labour and consumer indicators have cooled, raising questions about the durability of US growth and giving the Fed more cover to ease if needed.

2. Inflation expectations have eased

Market-based inflation expectations have moderated from recent highs, trimming the urgency for the Fed to maintain a restrictive stance.

3. Markets are again leaning toward another cut

With the data softening and the Fed attempting to maintain credibility amid the government shutdown, investors have shifted back toward expecting a dovish message next week, even if the Fed prefers a slower pace of cuts.

The result: the dollar is coming off its highs, and USD pairs have become more volatile as traders adjust positions ahead of the meeting.

This means GBP/USD is being pulled in two directions: sterling still weak, but the dollar no longer as dominant.

What It Means for Clients, Corporates & Advisers

For high-net-worth clients, cross-border investments, property purchases, and large transfers remain highly sensitive to timing. GBP is struggling; USD is softening. That creates windows of opportunity, but also risk. Forward contracts can lock in certainty at a time when both currencies are unpredictable.

Corporates - a weaker pound raises import costs, while a softer dollar offers temporary relief. Hedging strategies should assume two-way volatility, not a straight-line trend in either direction. Budget-driven uncertainty in the UK plus Fed-driven uncertainty in the US means businesses must update forecasts now, not later.

For referral partners (accountants, lawyers, real-estate advisers), their clients are already more engaged because of Budget changes - which makes this an ideal moment to bring FX risk into the conversation. Explaining how fiscal policy and central bank messaging feed directly into exchange rates adds real value to client decision-making.

Strategic Steps to Consider

• Use forwards to protect against GBP downside or USD swings.

• Stagger transactions rather than relying on a single spot rate.

• Run Budget-plus-Fed scenarios for clients with multi-million exposure.

• Watch gilt yields and the Fed press conference, these may be more market-moving than the headline rate decision.

  
  

The UK Budget has left sterling on the back foot. The US dollar is softening ahead of the Fed. For investors, corporates and advisers, this is a rare moment where both currencies are simultaneously vulnerable.

Disclaimer: The information in this publication is provided for general information purposes only. It does not constitute financial or investment advice, nor should it be relied upon as such. Readers should consider their own circumstances and seek independent advice where appropriate.