Sterling Up After Budget Leak; Inflation Slows Now

Introduction

Over the past week sterling registered a modest recovery against major currencies after a sequence of concrete UK developments: a rare leak of the Office for Budget Responsibility’s (OBR) Budget outlook, a noticeable easing in headline inflation and weaker retail sales. These events pushed gilt yields lower and created a temporary relief rally in GBP, even as the medium-term outlook for growth and inflation remains mixed. This article outlines the data that moved the pound, the market mechanics behind those moves, and what to watch next.

Key events that moved the pound

OBR Budget leak and immediate market reaction (26 November)

On 26 November the OBR accidentally published its full Budget projection ahead of the Chancellor’s speech. The incident was an administrative error, but markets focused on the substance rather than the slip-up: the OBR’s figures showed a slightly firmer near-term growth profile and fiscal outcomes that avoided the large surprises that can unsettle investors.

Gilt markets responded first—10‑year yields fell by roughly 5–11 basis points—reflecting a relief trade that reduced the risk premium on UK sovereign debt. That bond rally fed into currency flows: sterling strengthened by a few tenths of a percent intraday, with reports noting GBP appreciated in the 0.2–0.5% range against major peers as traders unwound short positions and repositioned into gilts.

Inflation eases but underlying pressures persist (19 November)

The UK’s consumer price index (CPI) for November showed headline inflation slowed to 3.6% year-on-year, the weakest reading in several months. While the headline drop was market‑relevant, the breakdown painted a more nuanced picture: food inflation rose materially and services inflation remained elevated—both signals that core price pressures have not fully dissipated.

Markets treated the CPI print as benign for the short term but not decisive enough to change immediate expectations for the Bank of England (BoE). As a result, sterling drifted only slightly after the release, with GBP/USD around the low-1.31 area and GBP/EUR roughly near 1.13 at different points through the week.

Retail sales weakness (21 November)

Retail volumes declined in November, with headline month-on-month drops and annual growth slowing to near zero. This indicated some consumer softening ahead of the Budget and added to concerns about growth momentum. Yet the currency reaction was muted—investors appeared to give greater weight to the fiscal outlook and bond-market moves than to a single month of retail data.

Why these events matter for sterling

Link between gilts and the pound

UK government bond yields are a central conduit for GBP moves. When gilt yields fall, UK assets can look comparatively more attractive relative to dollar or euro assets only if the yield trends reduce perceived risks. The OBR leak produced a tactical drop in yields, encouraging carry flows into gilts and a modest rise in sterling. Conversely, any future rise in gilt yields—driven by fiscal deterioration or inflation surprises—would likely put downward pressure on GBP.

Monetary policy implications

Inflation slowing toward 3.6% and a drop in short‑term inflation expectations (a YouGov/Citi measure showed one‑year expectations falling to about 3.7%) provide the BoE with more flexibility. Markets are parsing whether these signals permit an earlier easing cycle or simply delay further tightening. The December Monetary Policy Committee meeting has become a focal point: a dovish tone would typically weigh on sterling, while a hawkish surprise would support it.

What traders and readers should monitor next

• BoE communications: any shift in the Committee’s forward guidance will be decisive for short-term GBP moves.
• Gilt yields: continued declines could sustain the current sterling rebound; a reversal would signal renewed caution.
• Upcoming economic prints: subsequent CPI updates, wage data and retail/income flows will clarify whether the recent easing is durable or transitory.
• Fiscal follow-through: formal Budget details and market assessment of UK fiscal credibility will influence medium-term exchange rate trends.

Conclusion

Last week’s tangible developments—an accidental OBR Budget leak, lower headline inflation and softer retail sales—combined to produce a cautious, relief-driven rally in sterling. The move was underpinned by falling gilt yields and easing short-term inflation expectations, but it is not yet a structural turnaround: sticky services and food inflation, plus a downgraded growth outlook for 2026 from the OBR, mean sterling’s path remains sensitive to further data and central bank signals. In the coming weeks the BoE’s messaging and any fresh fiscal updates will be the primary drivers determining whether the pound’s recent gains hold.