UK Budget: Growth and Trade Fears Curb Pound Forecast Outlook

March 27, 2025 - Written by Tim Boyer

STORY LINK UK Budget: Growth and Trade Fears Curb Pound Forecast Outlook

Underlying reservations over the UK growth outlook curbed Pound confidence in global markets. Trade fears and wider uncertainty surrounding the international outlook also remained a key element ahead of the April 2nd US Administration announcement on tariffs.

The overall budget impact was limited with some relief in the bond market as the 2025/26 gilt issuance forecast was lowered slightly. The UK 10-year bond yield retreated to 4.73% after a brief spike to 4.80%. Unease over growth trends curbed net Pound support.

The Pound to Dollar (GBP/USD) exchange rate retreated to lows of 1.2875 from 1.2900 ahead of the statement with markets more confident that the Bank of England will cut rates in May.

According to ING; “It looks like the market is under-pricing this year's Bank of England easing cycle. The market prices just 40bp of easing, while we see a risk of three more 25bp cuts. The narrative of tighter fiscal and looser monetary policy should be sterling negative. GBP/USD looks vulnerable to 1.2860 and possibly 1.2800 today.”

The Pound to Euro (GBP/EUR) exchange rate was little changed at 1.1985 as the Euro lost ground.

Much of the Pound damage was done earlier in the session after the latest inflation data.

Chancellor Reeves reiterated that the fiscal rules are non-negotiable and that there will still be £9.9bn headroom in 2029/30.

There would have been a shortfall of £4.1bn without further action and there has, therefore, been an adjustment of around £14.0bn.

There will be net welfare spending cuts of £3.4bn with additional changes to universal credit rules.

There will also be slower spending growth later in the forecast period.

As far as growth is concerned, the OBR has halved the 2025 GDP growth forecast to 1.0% from 2.0% in October, although still above the Bank of England’s 0.7% growth projection.

The 2026 forecast has been increased marginally to 1.9% from 1.8% previously with growth between 1.7-1.9% in the following three years.

The OBR, however, warned that there will be a notable hit to growth if the US imposes trade tariffs.

Defence spending will be raised to 2.5% of GDP and there will be an additional £2.2bn in spending in the next fiscal year while international aid will be cut to 0.3% of GDP.

Earlier, the headline inflation rate declined to 2.8% from 3.0% and compared with consensus forecasts of no change.

The underlying inflation rate declined slightly more than expected to 3.5% from 3.7%.

The goods inflation rate retreated to 0.8% from 1.0% with the services-sector rate unchanged at 5.0%.

Capital Economics chief UK economist Paul Dales expects a decline to 2.5% next month before a renewed increase to above 3.0% the following month amid a surge in utility prices.

ING commented; “There are tentative signs that the forthcoming rise in employer National Insurance is having an impact on service sector inflation, which came in a tad higher than expected in February. It should still fall back in the second quarter, though, keeping the Bank of England on track for three further rate cuts this year.”

Markets are now pricing in an 80% chance of a May Bank of England rate cut from close to 50% previously.

According to Deutsche Bank; “We continue to think a May rate cut is more likely than not. And we expect Bank Rate to fall to 3.25% next year as headline pressures recede and wage settlements fall back to a more target-consistent level of 3%.”

MUFG maintains a positive Pound stance on trade grounds; “Gains for the pound also reflect optimism that the UK will avoid the worst of Trump’s reciprocal tariff plan and hence GBP support should be maintained until we get confirmation or not of that next week.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Sterling Forecasts