Sterling strengthens ahead of budget

The British pound edged up to $1.318 as traders awaited Chancellor Rachel Reeves’s crucial budget.

She is expected to unveil a range of tax increases on the wealthy to plug a £20 billion fiscal gap, after weeks of political pressure from Labour MPs and turmoil around Keir Starmer’s leadership.

Reeves must balance demands from her party with the need to reassure gilt investors, who have been demanding a higher premium on UK debt. Reeves is expected to create £15–20 billion in fiscal headroom, and markets will focus on whether her plan appears credible.

Recent data underline the challenge: borrowing is at a record high outside the pandemic, business activity has stalled, retail sales fell sharply, and consumer sentiment weakened.

Meanwhile, inflation eased to 3.6% in October, boosting expectations that the Bank of England will cut rates next month. Markets now see an 80% chance of a 25-bp cut in December.