Pound Gains Amid U.S. Deal, Faces Slow GDP and Political Turbulence

The British pound rose amid a U.S. government reopening deal, although gains were limited by sluggish UK GDP growth data. Finance Minister Rachel Reeves' upcoming budget poses uncertainty, while political issues and potential Bank of England rate cuts also influence the pound's outlook.

The pound experienced a rise on Thursday following the announcement of a deal in Washington to reopen the U.S. government after a historic shutdown. This positive momentum drew investors towards more volatile assets. However, the gains were moderated by the latest figures revealing a mere 0.1% growth in the UK's economy for the third quarter of 2025, a notable slowdown from the 0.3% growth recorded in the preceding quarter.

This stagnation in economic expansion sets the stage for Finance Minister Rachel Reeves, who is currently preparing her budget for November 26, widely anticipated to introduce several tax increases. Amidst this financial climate, political instability looms large with Prime Minister Keir Starmer dealing with intra-party divisions and declining poll ratings, which serve as potential factors that might further weaken the pound if market perceptions of political risk intensify.

As Lee Hardman, a currency strategist at MUFG, noted, these developments come at a time when traders are anticipating a significant December rate cut from the Bank of England, with more reductions expected next year. With options traders increasing their demand for protecting against sterling volatility ahead of Reeves' budget, indicated by a rise in implied volatility to 6.83%, the financial landscape appears particularly uncertain heading into the new year.

(With inputs from agencies.)