GBP stays afloat after leaked budget

Sterling withstood Rachel Reeves’ Budget and has recovered slightly as the risk event has passed

The Chancellor’s Budget lifted her fiscal headroom against the fiscal mandate to the highest since March 2022, which alleviated markets’ fears over the UK’s fiscal credibility. That is despite the backloaded nature of the consolidation, although a benefit of that for sterling is that there is no extra drag on the UK’s near-term growth outlook. Rachel Reeves and Keir Starmer both remain under political pressure though, and that pressure may weigh on sterling were it to develop further, but for now the pound has picked up after finding a floor at 1.3000 versus the USD. As we head into the crucial corporate budgeting season, thoughts begin to turn to how sterling may perform in 2026. Before that though, we have an interest rate meeting that is very much a ‘live’ one. Rachel Reeves’ Budget may have passed, but the risks in FX markets very much remain..

December rate cuts look likely either side of the pond

November’s Bank of England decision was a close one - a 5-4 vote led to a hold at 4.00%, with Governor Andrew Bailey holding the deciding vote. We have another set of UK data due before the coming meeting, including CPI inflation the day before, but on balance it looks like Bailey might vote for a cut as it stands. Sterling movement may be limited given it is heavily priced in, but the delivery might see a weakening nonetheless. Meanwhile in the US, the rate-setting committee is clearly divided, but unlike in the UK not every member holds a vote each year. This year’s set of voters feels slightly more tilted towards the cutting camp, which may well see a third consecutive reduction next week. Another question on the market’s lips is who the next Fed Chair will be, with Trump’s announcement now seemingly postponed until the new year. The new Chair will be instrumental in deciding the 2026 Fed outlook.

Sources: Macrobond, Bloomberg, Investec.
Notes: dashed lines show the average movement over the six fiscal events preceding the latest Budget.

In the Eurozone, investment is the key focus for 2026

Nine months on from the euro’s leg higher on proposed significantly higher fiscal spending in Germany, and we are closer to that promise materialising. Germany has now approved its 2026 Budget, paving the way for huge increases in investment in the coming year. This will likely lead to a clear step up in German GDP growth next year, despite the drag from the firmer euro. Elsewhere, there is less scope for a similar step up in spending; France remains a case in point. Still, for the Eurozone as a whole, economic growth looks to remain resilient next year, which would bring further positive news for the euro and the surrounding currencies, such as the SEK, HUF, and PLN. The Swedish krona has been the outperformer in the G10 this year, and the consensus on Bloomberg expects that to continue, with the median forecast looking for a further 6% fall in USDSEK by end-2026. In EURUSD, focus will remain on any break of 1.2000 – our economists still expect 1.2500 by the end of next year.
 

In Japan, the yen has weakened despite rising odds of a near-term Bank of Japan (BoJ) rate hike, as trader scepticism over the new prime minister’s fiscal policy continues

Interest rate markets now imply roughly an 80% chance of a rate increase at this month’s meeting – the BoJ remains the only G10 central bank currently moving in that direction. Yet the JPY continues to struggle, weakening by more than 5% versus the USD in the past two months – EURJPY touched a new record high of 182.01. Meanwhile, New Zealand’s interim central bank governor has shifted the NZD’s narrative slightly, just ahead of his new permanent replacement taking office on 1 December, implementing a more hawkish tone after 200 basis points of rate cuts this year. GBPNZD touched a ten-year high of 2.3553 before falling more than 2% back to the 2.3000 region. This month brings the usual rush of data and central bank decisions before the Christmas period, to close out a year in FX that has caught many by surprise, as per last December’s forecasts shown in Chart 2.

Notes: as of 08:16 GMT, 04 December 2025
Sources: Bloomberg, Macrobond, Investec

Forecasts

Sources: Macrobond, Bloomberg, Investec

Sources: Macrobond, Bloomberg, Investec

Sources: Macrobond, Bloomberg, Investec

Notes: Forecasts are produced by Investec Economics and are for end-quarter
Chart data as of 08:16 GMT, 04 December 2025