Sterling Slips as UK Growth Falters and Political Tension Rises

The pound is under renewed pressure, falling to its weakest level against the euro in over two years and hovering near a seven-month low versus the dollar. A disappointing run of UK data has reignited talk of a Bank of England rate cut next month, just as fiscal and political uncertainty deepens ahead of the November 26 Budget. 

The latest ONS figures confirmed that the UK economy grew just 0.1% in Q3, half the pace seen in Q2 and below expectations. September GDP also contracted by 0.1%, marking the third straight month of zero or negative growth.

The downturn was driven by a steep fall in car production following a cyberattack at Jaguar Land Rover, compounding weakness in manufacturing and consumer spending. 

Unemployment has risen to 5.0%, the highest in four years, while pay growth has slowed to its weakest since early 2022. Together, this points to a cooling labour market and fading inflationary pressure this is the combination policymakers have been waiting for to justify a rate cut. 

Money markets now price an 80% chance of a BoE rate reduction in December, with traders fully aligned behind the view that easing will begin before year-end. 

Reports of a failed internal challenge to Prime Minister Keir Starmer’s leadership added a layer of political unease on Thursday. Investors fear any renewed instability could lift gilt yields and dent confidence in the government’s fiscal direction, not ideal timing with the Budget just two weeks away. 

Chancellor Rachel Reeves, under growing pressure to balance credibility with growth, has already signalled that tax rises are on the table to plug the £30 billion fiscal gap. Markets now see a fine line between restoring fiscal discipline and triggering further weakness in domestic demand. 

The Broader FX Landscape
Elsewhere, G10 currencies remain largely rangebound:

What It Means for Businesses
For UK importers and businesses paying in euros, dollars, or francs, this environment is challenging.
Sterling’s softness raises costs, and the next two weeks leading into the Budget could bring further volatility if fiscal tightening is confirmed or economic data weakens again.

For those repatriating funds or holding foreign currency balances, however, the picture is more favourable. The recent slide offers an attractive opportunity to convert into pounds while rates remain near multi-year extremes.

Lamera View
The outlook for sterling remains fragile, but oversold conditions suggest limited room for panic.
Short-term rebounds are possible if upcoming labour or inflation data surprise positively, or if the Budget passes without controversy. The brief corrective rebound we identified earlier this week has now failed on weaker growth data. Still, with growth momentum fading and fiscal tightening on the horizon, volatility should be expected but not feared.
 
Clients managing GBP exposure may wish to:

For now, the path of least resistance for sterling remains lower but as always in FX, timing and discipline separate opportunity from risk.