UK Budget Released, Pound Wobbles
The release of the UK Annual Budget on Tuesday (March 3rd)—packaged as a fiscal update with the latest projections from the Office for Budget Responsibility (OBR)—came at a time of risk-off in global markets due to the energy boom. Chancellor Rachel Reeves said the government's fiscal headroom had increased to £23.6 billion for 2029/30, from around £22 billion in the full budget update in November.
However, a more cautious growth tone overshadowed the market reaction. Reeves referred to the OBR's lowered outlook, with the UK economy expected to grow 1.1% this year—weaker than the previous 1.4% projection—amid global uncertainty and rising energy costs.
Consequently, sterling weakened as investors assessed the combination of "improving fiscal conditions but slowing macroeconomic conditions" and inflationary risks from energy. At 8:28 AM ET (13:28 GMT), GBP/USD fell 0.65% to $1.3319, hitting its weakest level in three months, while it held steady against the euro at around 87.14 pence.
The primary transmission was through commodities: the oil rally exacerbated inflation fears, leading markets to scale back expectations for a Bank of England rate cut. At the same time, the rise in gilt yields reflected a repricing of inflation risks and financing supply—a combination that is usually unfavorable for the GBP when global sentiment is defensive.
Going forward, the GBP will be highly sensitive to two variables: how long energy remains high and how the OBR/BoE assesses the pass-through of inflation to domestic prices. If the oil risk premium persists, the “rate cuts are delayed” narrative could support the dollar and restrain the pound’s recovery, even as more fiscal space provides a cushion against domestic credit risk.
Source: Newsmaker.id
