Concerns Behind the GBP Rebound: Can the Short-Term Rally Withstand Long-Term Downward Pressure?

On December 3rd, the GBP/USD exchange rate suddenly strengthened, with a daily increase of 1.08%, closing at 1.3350, reaching a nearly one-month high. During the same period, EUR/GBP fell by 0.63% to 0.8737. This upward movement was not triggered by positive news from the UK itself but was driven by the passive weakening of the US dollar—US November ADP employment data fell short of expectations, coupled with Trump’s hints about the Federal Reserve chair nomination, leading the market to reprice the likelihood of rate cuts.

UK Budget Relief Eases Anxiety, Short-term Rebound Has Basis

There is another reason behind the subtle shift in market sentiment towards the pound. After the UK budget was announced, investors’ concerns about the country’s debt risk significantly decreased, providing a breathing space for a restorative rebound in the pound before the end of the year. Ebury strategists pointed out that “eliminating budget uncertainties could provide room for a rebound in the pound before year-end.”

From a central bank policy perspective, the OECD forecasts that the Bank of England will complete two rate cuts by June next year, bringing the benchmark interest rate to 3.5%, marking the end of this easing cycle. The report also raised the UK’s medium-term growth outlook, upgrading the 2026 GDP growth forecast from 1% in September to 1.2%, and further to 1.3% in 2027. UK Chancellor of the Exchequer Jeremy Hunt welcomed this positive adjustment and recently claimed that UK economic growth could surpass expectations.

Long-term Dilemma Remains, Institutions Warn Pound Under Pressure

However, whether this short-term optimism can last remains uncertain, with industry analysts holding a cautious view. Deutsche Bank pointed out that the UK’s structural problems are far from resolved—spending growth could surge significantly over the next two years, followed by inevitable fiscal tightening measures. “UK budget issues will evolve into a long-term problem, with negative news potentially emerging continuously. The lack of a clear solution means this pressure will weigh on the pound for a long time.”

Goldman Sachs’s outlook is even more pessimistic. The bank believes the core dilemma facing the UK is the contradiction between fiscal constraints and monetary easing—on one hand, the government must tighten belts, while on the other, the central bank is cutting rates to release liquidity. More worryingly, risks in the UK labor market are intensifying, which will further strengthen downward pressure on interest rates. Compared to other European currencies in the G-10, the pound lacks sufficient support momentum.

Investment Outlook: Divergence Between Expectations and Reality

Based on the above analysis, Goldman Sachs has raised its medium-term forecast for EUR/GBP. The bank expects the euro to rise to 0.89 in three months, 0.90 in six months, and 0.92 in one year—implying further depreciation of the pound against the euro. This outlook reflects a reassessment of the UK’s long-term growth prospects and monetary policy space.

In summary, the recent rise in the pound is more of a rebound than a reversal, and the structural issues behind it have not been resolved. While investors enjoy the gains from the recent rally, they should also remain cautious of downward pressures that may gradually emerge in the coming months.