LGT Snapshot: Sterling under the spotlight - 12th November 2025

With the end of the month fast approaching, the spotlight turns to the upcoming UK Budget and how it will attempt to steer a sluggish economy. Fifteen months ago, Sir Keir Starmer's government took office with one of Labour's biggest mandates ever. The public had grown weary of 14 years of Conservative rule and backed Labour's pledge to boost growth, reform welfare, and hold the line on taxes. But the honey was short-lived.

Economic backdrop

Growth remains weak. The UK economy expanded by just 0.3% in the three months to June 2025, following a 0.7% rise in Q1.[1] Forecasts suggest full-year growth of around 1.3% for 2025, then slipping further in 2026, closer to 1% or lower.[2] At the same time, long-term borrowing costs have surged. Ten-year gilt yields are hovering around 4.4- 4.7% and 30-year gilt yields are back near 5.5%, levels not seen for decades.[3] These rising yields reflect concerns that the government is struggling to maintain fiscal discipline and as a result, investors are demanding higher returns for UK debt.

Inflation has moderated from its peak but remains above the target, limiting the scope for aggressive rate cuts by the Bank of England (BoE). Interest rates stand at 4%, and while some members of the Monetary Policy Committee (MPC) voted for a cut in this month’s meeting, the broader environment remains cautious.

What to expect from the Budget

Can Rachel Reeves restore fiscal credibility without derailing growth? After signalling that tax rises may be unavoidable, she’s preparing the public for a ‘cautious and credibility-focused’ statement. The fiscal backdrop is tight: debt interest now absorbs a tenth of all public spending, and likely downgrades to productivity forecasts from the Office for Budget Responsibility (OBR) will further narrow her already slim £10 billion headroom. The priority will be to reassure markets that Labour can be trusted with the public purse and avoid another gilt market shock like in 2022.

If Reeves succeeds in convincing investors of her fiscal discipline, gilt yields could ease and borrowing costs may fall, creating space for the BoE to begin cutting rates early next year. That could lift consumer sentiment and support modest sterling strength, factors we have considered in portfolio positioning.

Why we’ve hedged the US dollar

In this environment of muted UK growth and heightened global uncertainty, currency risk is a key consideration. As part of our positioning, we have switched our holding in the L&G S&P Equal Weight Index fund to its hedged share class to reduce exposure to the US dollar, hedging at a 7-month low for GBP/USD. As part of this move, we worked closely with L&G to help launch the fund – recognising a clear gap in the market for equal-weight passive exposure with currency protection. The collaboration demonstrates both our scale and our ability to develop solutions where none previously existed

While our conviction in select US equity opportunities remains strong, we believe there is an elevated risk of dollar weakness over the next few years, driven by factors such as a more politically-influenced Federal Reserve (Fed), a shifting US export strategy, and global diversification of reserve currencies. A falling dollar would erode returns when converted back to pounds. By hedging currency exposure, we retain full exposure to US equities while protecting the portfolio from potential FX headwinds.

On the other side of the coin, the UK’s fiscal credibility and growth prospects influence sterling strength. If the UK regains investor confidence through a disciplined Budget and the BoE cuts rates gradually, sterling could strengthen. A stronger pound would reduce the value of unhedged US dollar assets when converted back to sterling, so hedging the dollar protects against that risk.

With the UK economy treading water and global volatility rising, hedging is part of a broader strategy to reduce unnecessary risks. Currency exposure can magnify swings in returns unrelated to the underlying investments, so managing it helps stabilise performance in uncertain conditions.

[1] Trading Economics

[2] Vanguard

[3] Trading Economics

Source: LGT Wealth Management

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