The recent UK budget has sparked mixed reactions due to its failure to tackle economic growth. Initially, the markets reacted steadily, with the pound and long-term gilts experiencing a short rally since the budget measures won’t take immediate effect. However, Société Générale highlights the lack of growth-focused initiatives, which might impact the pound’s future value.

Growth Outlook And Monetary Policy

The growth outlook is crucial for the pound’s value. Modest GDP forecasts predict the UK and Eurozone will grow by 1.1% and the US by 1.9% by 2026. Société Générale anticipates that the GBP and EUR will weaken against the USD, projecting GBP could decline to 0.9 in the next few months. Another important factor is monetary policy. Analysts believe the UK has more room to cut interest rates compared to other regions, forecasting a 1% rate drop by 2026, while the market expects a 60 basis point decrease. Additionally, the pound is seen as overvalued based on purchasing power parity, particularly against the EUR/GBP rate. This overvaluation could be risky, considering previous corrections following periods of GBP weakness, which have occurred during past financial and political crises. The recent budget’s inability to stimulate economic growth presents a significant challenge for the pound. Although there was a brief rally in gilts and sterling, new data from the ONS reveals underlying weaknesses. The third-quarter GDP for 2025 was a mere 0.1%, contrasting with the US economy, which grew by 0.6% in that same period. We believe the Bank of England has more capacity to lower interest rates than the market currently anticipates for 2026. The inflation rate dropped to 2.8% in October 2025, and recent MPC meeting minutes showed differing opinions, indicating a shift towards more flexible policies. This divergence from the more resilient US economy suggests potential further declines for the GBP/USD pair.

Pound Value Against Euro

The pound also seems significantly overvalued against the euro, especially regarding long-term purchasing power parity. Similar overvaluations have previously unwound sharply, as seen during the 2008 financial crisis and after the 2016 Brexit vote. A significant political misstep, like a failure to agree on spending cuts, could easily drive the EUR/GBP exchange rate towards 0.9000. In the upcoming weeks, traders should think about positioning for sterling weakness, especially against the dollar. Buying GBP/USD put options may be a smart strategy to take advantage of the expected differences in policy and growth gaps. For the EUR/GBP pair, considering options that benefit from a rise seems prudent given the mounting valuation and political pressures. Create your live VT Markets account and start trading now.

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