GBP/USD breaks above 1.3244 to hit a one-month high. Can the UK budget sustain the rally?

**Market performance under policy escalation**

After UK Chancellor Rachel Reeves announced the Autumn Budget on Wednesday, the market reacted enthusiastically. The budget, centered on tax increases, is expected to generate approximately £26 billion in additional revenue, doubling the fiscal buffer to £22 billion, well above the expected £15 billion. As the budget takes effect, UK equities, bonds, and currency markets all rose—FTSE 100 up 0.85%, GBP/USD surged 120 points to 1.3244, hitting a nearly one-month high; UK bond prices climbed, pushing the 10-year yield down to 4.42%.

The five-day consecutive rise of GBP/USD has sparked market speculation—does this rebound indicate a turning point for the exchange rate? However, Morgan Stanley has poured cold water on the optimism. The bank believes that the pound may only be experiencing a final wave of gains driven by budget hedging, and has announced the end of its bullish stance on the pound. Morgan Stanley pointed out that the correlation between GBP/USD and the stock market has fallen to zero, and with a lack of active domestic catalysts in the short term, this significantly undermines the currency pair’s attractiveness.

**Policy attempts amid economic difficulties**

It is important to note that the background of this budget announcement is not optimistic. The UK economy faces multiple headwinds—weak growth, high inflation, insufficient investment, and stagnant productivity. Although the fiscal buffer has improved, the scale of the budget is limited, raising doubts about its impact on economic growth.

The UK Office for Budget Responsibility’s latest assessment is even more concerning—its growth forecasts beyond 2026 have been downgraded, with potential output growth lowered to 1.0%, reflecting clear shortcomings in capital investment, technological progress, and labor productivity. This indicates that even with tax hikes, the UK’s medium-term growth outlook remains under significant pressure.

**Central bank policies and dollar weakness**

The market views this budget as paving the way for future rate cuts by the Bank of England. With increased fiscal space and improved budget deficits, the BoE has more room for policy adjustments. UK inflation has fallen back to 3.6%, and although it remains above the 2% target, it will take time to reach it (projected to be until 2027), and expectations for rate cuts are gradually forming.

It is worth noting that the recent rise in GBP/USD cannot ignore the dollar’s own weakness. Market expectations for a December Fed rate cut have risen to 85%, with bets on three more cuts over the next year. Against this backdrop, the strength of GBP relative to USD is understandable.

**Technical outlook: the 1.3200-1.3240 zone becomes key**

The daily chart shows GBP/USD has broken above the 1.3200 level and has achieved five consecutive days of gains, with the AO indicator reflecting increasing upward momentum. If the exchange rate can find support in the 1.3200-1.3240 zone, further testing of resistance around 1.3400 is possible. While the possibility of a mid-term turning point exists, Morgan Stanley’s warning warrants careful consideration—are the policy-driven positives enough to sustain a long-term rally in the pound, or is this merely a phase of rebound?