Assessing GBP/USD's Near-Term Outlook Amid UK Autumn Budget and OBR Projections

The UK Autumn Budget 2025, delivered by Chancellor Rachel Reeves, has introduced a mix of fiscal tightening and growth-oriented measures, reshaping the economic landscape for the pound-dollar (GBP/USD) pair. With the Office for Budget Responsibility (OBR) forecasting revised growth and inflation trajectories, and the Bank of England (BoE) maintaining a cautious stance on interest rates, the interplay between fiscal policy and monetary expectations will be critical in determining GBP/USD dynamics in the coming months.

Fiscal Policy: Taxation and Fiscal Buffers as Stabilizers

The budget's core fiscal measures aim to address long-term public finances while mitigating short-term inflationary pressures. A freeze on income tax thresholds until 2030/31 is projected to raise £7.6 billion by 2029/30, while a new annual tax on homes valued above £2 million and higher dividend and gambling duties are expected to generate an additional £1.1 billion and £25 billion annually, respectively. These measures, combined with a doubled fiscal buffer to £22 billion, signal a commitment to reducing future fiscal volatility.

However, the OBR notes that these policies will initially increase borrowing, with tax revenues rising from 36.3% of GDP in 2025-26 to 38.3% by 2030-31. While this back-loaded consolidation may stabilize public finances over time, the immediate burden on high-income earners and asset holders could dampen consumer and business confidence, potentially slowing growth in the near term.

OBR Projections: Growth, Inflation, and Productivity Challenges

The OBR's revised economic outlook paints a mixed picture. Real GDP growth for 2025 is projected at 1.5%, up from 1% in March 2025, driven by infrastructure investments and welfare reforms. Yet, a downward revision to the productivity forecast-from 1.3% to 1.0%-threatens long-term revenue expectations, reducing tax income by £16 billion in 2029-30. This underscores the fragility of the UK's growth model, which relies heavily on public sector spending and inflation-driven tax receipts.

Inflation remains a key concern, with the OBR raising its 2025 forecast to 3.5% due to persistent energy and food price pressures. While the government's energy bill reductions and frozen train fares aim to ease cost-of-living pressures, these measures may only marginally offset broader inflationary trends. The BoE's recent decision to hold rates at 4%-despite a 4-1 MPC vote for a 25-basis-point cut-reflects lingering uncertainties about inflation's trajectory.

BoE Response and Interest Rate Expectations

The BoE's November 2025 rate decision, which maintained the Bank Rate at 4%, highlights the central bank's cautious approach. Governor Andrew Bailey emphasized that inflation, currently at 3.6%, is expected to fall to 3.2% by March 2026. However, the MPC's split vote suggests growing internal pressure to cut rates, particularly if the budget's fiscal measures succeed in stabilizing inflation.

Markets are pricing in an 80% probability of a 25-basis-point rate cut in December 2025, with further reductions likely in early 2026. This aligns with the BoE's acknowledgment that the budget's tax and spending policies could reduce inflationary pressures, creating room for monetary easing. Conversely, if fiscal consolidation proves insufficient to curb inflation, the BoE may delay cuts, prolonging GBP weakness.

GBP/USD Dynamics: Fiscal-Monetary Interplay and Market Sentiment

The GBP/USD pair has already reacted to the budget, with the pound rising amid reduced economic uncertainty and revised growth forecasts. However, the currency's near-term trajectory will hinge on the BoE's response to inflation and the Fed's policy path.

On the UK side, the BoE's potential December rate cut could weaken the pound if it precedes similar Fed action. Conversely, if the Fed delays cuts-despite a 85% market expectation of a December reduction-GBP may find support. The budget's focus on fiscal buffers and long-term growth could also bolster investor confidence, offsetting short-term volatility.

Conclusion: Balancing Fiscal Discipline and Monetary Flexibility

The UK Autumn Budget 2025 represents a strategic attempt to stabilize public finances while addressing inflation and growth challenges. However, the success of these measures in bolstering GBP/USD will depend on their ability to reduce inflationary pressures without stifling economic momentum. The BoE's December decision will be pivotal, as will the Fed's response to its own inflation and employment data. Investors should closely monitor fiscal-monetary coordination, as divergent policy paths could amplify GBP/USD volatility in the coming months.