Tax, Spend, or Both?
Either tax rises or spending cuts (or both) will be needed if Reeves is to meet her self-imposed fiscal rules and, given Labour’s mantra, the former seems most likely. Nevertheless, the conference is set to end on Wednesday with Reeves keeping her options open. She is due to receive the OBR’s latest forecasts on Friday, and particular attention will be paid to growth forecasts, which could have a significant impact on the gap in public finances.
Gilt Jitters Linger
At the beginning of September, rising yields on UK government debt hit the headlines as the yield on the 30-year benchmark reached its highest level since the late ‘90s. Many saw it as a sign that the market is losing confidence in the UK government, although – as previously discussed – there were several contributing factors. Although yields have since eased back from their highs, they remain elevated by historical standards and there is clear apprehension over what’s to come.
Sterling Treads Water
Sterling has been relatively stable against the dollar over the past month (it looks set to end the month around -0.5% on a spot returns basis), however its cause has been aided by negative influences on the USD side. Against the euro, the pound is down almost 1% leaving GBP/EUR right towards the bottom of its recent range (and arguably showing signs of breaking lower).
Outlook: Cautious on the Pound
Looking forward, we continue to forecast GBP/USD higher, although our view remains predicated on the premise of a weaker dollar. Against the euro and other G7 currencies, we remain cautious about sterling’s prospects given the risks highlighted above. For now, we continue to see little reason to be bullish on the pound and note that, while positioning data suggests that the market already holds a significant short position, it is far from extreme levels that would imply a correction is imminent. As such, our forecasts for both GBP/USD and GBP/EUR remain unchanged from last month.
| GBPUSD | 31/12/2025 Q4 25 |
31/03/2026 Q1 26 |
30/06/2026 Q2 26 |
30/09/2026 Q3 26 |
|---|---|---|---|---|
| Median (Consensus) | 1.37 | 1.37 | 1.38 | 1.38 |
| Mean | 1.36 | 1.37 | 1.37 | 1.38 |
| High | 1.40 | 1.44 | 1.44 | 1.48 |
| Low | 1.22 | 1.23 | 1.25 | 1.26 |
| Forward | 1.34 | 1.34 | 1.34 | 1.34 |
| Validus | 1.36 | 1.37 | 1.39 | 1.42 |
| GBPEUR | 31/12/2025 Q4 25 |
31/03/2026 Q1 26 |
30/06/2026 Q2 26 |
30/09/2026 Q3 26 |
|---|---|---|---|---|
| Median (Consensus) | 1.15 | 1.14 | 1.14 | 1.15 |
| Mean | 1.15 | 1.15 | 1.15 | 1.15 |
| High | 1.20 | 1.20 | 1.20 | 1.20 |
| Low | 1.11 | 1.10 | 1.09 | 1.09 |
| Forward | 1.14 | 1.14 | 1.12 | 1.12 |
| Validus | 1.14 | 1.14 | 1.14 | 1.12 |
Source: Bloomberg poll + Validus forecast
