UK Prime Minister Keir Starmer defended Chancellor Rachel Reeves and the Office for Budget Responsibility after a report was published too early. He stressed the importance of keeping fiscal stability, even though the early release was seen as a ‘serious error.’ The British pound is struggling due to ongoing budget issues. Spending may increase over the next two years, with plans for savings later. However, with elections approaching in the summer of 2029, it’s unclear if the government will make those savings or raise taxes. The next government might have to deal with these decisions.

Ongoing Budget Concerns

The UK’s budget problems are likely to affect the foreign exchange market for some time. Without clear solutions, these concerns could keep putting pressure on the pound. The budget situation is expected to keep influencing the currency. Given the current budget challenges, the pound may face downward pressure for the foreseeable future. Prime Minister Starmer’s support for the budget hasn’t reassured the market about the country’s long-term fiscal outlook. This uncertainty means any increase in GBP/USD could be short-lived. The main issue is that while spending is on the rise, significant budget cuts are being pushed off until after the 2029 election. The UK’s debt-to-GDP ratio stands at 103%, so investors doubt that promised savings will materialize. Recently, GBP/USD has struggled to stay above the 1.2400 mark, indicating a lack of confidence from buyers.

Market Uncertainty and Political Risk

We remember the market turmoil after the “mini-budget” in 2022, which showed how quickly investors can lose faith in the pound when budget discipline is questioned. This history sets a low limit for the currency’s strength. For derivative traders, buying GBP/USD put options seems wise to guard against or capitalize on more weakness in the upcoming weeks. Options with strike prices below 1.2000 could provide good protection against negative news about the budget. The market is already showing signs of this anxiety. Looking at implied volatility, the 3-month measure for GBP/USD is around 9.5%, higher than EUR/USD’s 7.0%. This indicates that the options market is expecting larger price movements for the pound than usual. So, traders should prepare for fluctuating conditions rather than a steady decline. Political factors add to the risk. Recent YouGov polls show Nigel Farage’s party ahead of Labour by two points. This political uncertainty makes it hard for the market to trust any long-term fiscal plans. For now, it seems the pound’s most likely movement will be sideways or down. Create your live VT Markets account and start trading now.

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