Institutional investors have offloaded the pound at the fastest pace since 2023 in anticipation of this week’s spring statement, where Chancellor Rachel Reeves is expected to unveil £15 billion in spending cuts as part of efforts to restore fiscal discipline.
According to Bank of America, the past three weeks have seen the sharpest outflows from sterling in over two years, with money managers — including asset managers and mutual funds — reducing exposure to the currency amid growing uncertainty around the UK’s economic trajectory.
The cuts, designed to meet Labour’s commitment to run a budget surplus by 2030, come as market sentiment remains fragile. Analysts at the US bank warned that traders are still “likely under-pricing the pound’s volatility risks,” adding: “We are concerned by the complacency in the foreign exchange volatility market. We do sense that market sentiment remains fragile and perhaps skewed towards a weaker fiscal outcome.”
The pound held steady against the US dollar on Tuesday, trading at $1.29. It has risen 3 per cent against the greenback since the start of the year, largely due to concerns over President Trump’s proposed tariffs weighing on the US currency. However, sterling has fallen 2 per cent against the euro in 2025 so far, sitting at €1.20.
Hedge funds have maintained “short” positions on the pound for much of the past year, betting on further declines in its value. By contrast, institutional investors have remained net-long on sterling, anticipating a rebound — a position that could quickly unravel depending on the tone and content of Wednesday’s fiscal statement.
The pound slumped to a two-year low on a trade-weighted basis earlier this year amid a broader global market sell-off. Since then, it has regained some ground on expectations that the Bank of England will carry out no more than two interest rate cuts this year — a scenario that typically supports a currency by preserving higher returns for investors.
Nevertheless, the spring statement is expected to shift the spotlight back onto the UK’s sluggish economic outlook. GDP forecasts from the Office for Budget Responsibility are likely to be cut from 2 per cent to closer to 1 per cent for 2025. Meanwhile, the UK continues to lead G10 economies on the so-called “misery index”, a measure that combines inflation and unemployment rates.
Goldman Sachs analysts echoed caution in the short term, suggesting that ongoing fiscal “noise” makes the pound “less attractive in the near term”. However, they noted that sterling could still benefit from the next round of US tariffs due on 2 April, which are expected to hit continental European economies harder than the UK.
The investment bank has revised its year-end forecast for the pound against the dollar to $1.29, up from a previous estimate of $1.26. Still, much hinges on how markets respond to Reeves’s first major fiscal intervention — and whether investors find her plans credible amid tightening public finances and subdued growth.
