Pound Sterling Forecast: What the Budget Means for GBP vs EUR, USD?

March 28, 2025 - Written by Tim Boyer

STORY LINK Pound Sterling Forecast: What the Budget Means for GBP vs EUR, USD?

The pound has made moderate gains against the euro and USD this week. The Spring Budget managed to avoid any unwanted market reactions and long-term growth was actually revised slightly higher.

Headline inflation missed estimates but services remained high and the BoE will not be swayed by a dip in the readings as increases are expected later this year.

Sterling traders have been kept busy this week with several key UK data releases to consider alongside the UK Spring Budget. Overall, the pound is higher against most G7 currencies and GBPUSD is +0.43% on Thursday. This isn’t necessarily driven by good news; rather there is relief that the Budget didn’t create any shockwaves and UK Gilts yields stayed relatively contained.

What the Budget Means for the Pound

This week’s Spring Budget was important and risks were high for Chancellor Rachel Reeves as options were limited.

“Higher borrowing costs had eradicated all of her fiscal ‘headroom’, money left over under the main fiscal rule mandating a current budget surplus by the end of the decade. The Treasury had little choice but to cut spending, without invoking a fatal political backlash, jeopardising the government’s ambition to boost growth, or sending bond yields even higher than they already are,” explained ING.

There was some trepidation leading into the announcement as spending cuts and tax rises were possible and markets have been edgy around budgets ever since the Kwarteng/Truss debacle sent yields soaring and crashed the pound.

Reeves managed to deliver a budget which was mostly neutral to markets, although many of the issues have been delayed rather than addressed. In fact, most of the expected spending cuts were pushed back to the end of the decade and cuts to welfare budgets and other government departments won’t take full effect for another four years.

The Office for Budget Responsibility revised growth figures in light of the announcement, and while it cut its 2025 numbers, it projected the government spending plans will lift GDP growth by 0.2% a year by the end of the decade. The 2025 downgrade wasn’t much of a surprise as their previous forecast of 2% was already thought to be too high and GDP in January was –0.1%. PMIs out earlier this week were also weak. The OBR now expect 1% growth this year.

Sterling was slightly higher and managed to shrug off the softer inflation data released earlier on Wednesday.

CPI Dips but Services Inflation Remains a Hurdle to Cuts

UK CPI data was released on Wednesday morning and there were some encouraging signs, mostly from the lower-than-expected headline print of 2.8%. A 3.0% reading was expected, and core CPI also came in softer than estimates. However, this was not enough to open the door for a dovish shift by the BoE and plans on when to cut will likely be unaffected. This is mostly due to sticky services inflation, which stayed stubbornly near 5%, but also because headline CPI is likely to rise in the coming months. According to ING, it is set to rise back up towards 4% later this year.

“We have it touching 3.7% in September. That’s largely an energy story, in part because past falls in natural gas prices are no longer a drag on headline CPI. Water bills are also set to rise significantly next month.”

Services are also likely to rise in April so this week’s lower headline number is not as encouraging as it initially seems. The pound was not moved significantly by the release which supports the view that it won’t have a great influence on BoE policy. Three cuts are expected this year which would keep rates in the UK considerably higher than the EU and other G7 countries such as Canada.

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TAGS: Pound Sterling Forecasts