Sterling slipped against a stronger Dollar on Wednesday as markets awaited a major UK spending review later in the day, to be presented by Chancellor Rachel Reeves, who is expected to outline the allocation of public funds.
The Pound was last trading 0.2% lower against the Dollar at $1.3472 at the time of writing, and also weakened slightly against the Euro, which gained 0.1% to reach 84.68 pence.
Meanwhile, the Dollar made modest gains against a basket of currencies after US and Chinese trade officials concluded two days of talks in London, agreeing on a framework to revive their tariff truce.
Reeves is expected to outline how approximately £2 trillion in public spending will be distributed. Plans already revealed include funding for research and development, public transportation, a new nuclear power plant, nuclear submarines, and prison infrastructure, Reuters reports.
“When it comes to day-to-day spending, there’s still probably not enough cash to go around, so more money would need to be found in the autumn budget,” stated Francesco Pesole, ING FX strategist.
“The take-away for markets today will simply be confirmation that there is very little fiscal headroom.”
Furthermore, according to Pesole, the main risk to Sterling would stem from movements in the gilt market, which tends to be more reactive to UK budget developments.
So far in 2025, Sterling has gained nearly 8% and remains close to a three-year high of $1.3593 reached on 26th May. Ongoing trade tensions and concerns over the global economic outlook have weighed on the Dollar, helping to lift the Pound.
In addition, the UK’s distinction as the only country to have secured a trade deal with the US has further supported Sterling’s strength.
However, the outlook for the UK economy remains uncertain. Employment data released on Tuesday revealed a sharp slowdown in wage growth and a rise in unemployment to its highest level in nearly four years for the three months to April.
Despite this, the Bank of England is still widely expected to hold interest rates steady at its meeting next week, with markets pricing in a 90% chance of no change.
Moreover, Commerzbank analysts noted that the recent jobs data indicates the UK’s real economy may be weaker than the stronger-than-expected first-quarter growth figures released last month had suggested.
Adding to the uncertainty was April’s inflation reading, which came in higher than anticipated. That surprise spike reduced expectations of an early interest rate cut by the Bank of England.