GBP/USD Exchange Rate: Impact of Chancellor Reeves’ Welfare Bill Unleashes Fiscal Risks

Amidst the media coverage of the political turbulence in the United Kingdom, Chancellor Reeves was observed in tears at the House of Commons earlier this week, raising concerns regarding her position until the subsequent elections. The speculation about Chancellor Reeves stepping down followed her appearance in tears at the House of Commons while unveiling the new welfare bill, which appeared to have a dampening effect on the pound.

Last week, UK Chancellor Rachel Reeves exceeded her self-imposed fiscal rules by increasing the Universal Credit standard allowance, a move likely to add £4.8 billion to the fiscal burden by 2029–2030. During her interview, she commented that the government would cover the costs of increased welfare spending but did not clarify whether this would involve raising taxes or cutting spending. Reeves stated, “Of course, there is a cost to the welfare changes that Parliament voted through this week, and that will be reflected in the Budget.” Previously, in the Autumn Budget, Reeves pledged not to borrow for daily public spending and aimed for debt to fall as a share of UK economic output by 2029/30. However, new welfare reforms are expected to negate the government’s plan to save £5.5 billion by 2029–30, according to data from the UK Institute for Fiscal Studies (IFS).

While the market continues to digest the UK’s economic outlook, Trump’s evolving economic policies are contributing to fluctuations in the Cable pair.

With the 9 July deadline fast approaching, US President Donald Trump has intensified his tariff campaign. On Sunday, he announced that the US would start sending out final and non-negotiable tariff notices to countries from Monday. According to Trump, approximately 12 to 15 notices would be sent on the first day, with more to follow. These notices will specify tariff rates that differ based on each country’s trade history, ranging from 10% to 20% and potentially increasing to 70%. Ongoing trade tensions and policy uncertainty from Washington have attracted intense criticism from BRICS nations (Brazil, Russia, India, China, and South Africa), who also condemned recent US and Israeli military strikes on Iran. In a joint statement after their summit in Rio de Janeiro on Sunday, the bloc expressed “serious concerns about the rise of unilateral tariff and non-tariff measures”, which they regarded as “inconsistent with WTO (World Trade Organisation) rules”.

In response, President Trump intensified his stance, announcing on Sunday that any nation supporting what he called the “anti-American policies” of the BRICS bloc would face an extra 10% tariff. “There will be no exceptions to this policy. Thank you for your attention to this matter!” Trump wrote on Truth Social. His firm rhetoric has further unsettled markets, boosting the greenback’s attractiveness as investors seek safety amid growing geopolitical and trade uncertainties. Top US officials confirmed that the next round of tariffs is scheduled to take effect on 1 August, adding urgency to ongoing trade negotiations. Commerce Secretary Howard Lutnick stated over the weekend that while President Trump is currently setting the rates and terms, “the implementation schedule remains firm. Tariffs go into effect on 1 August,” Lutnick told reporters. Treasury Secretary Scott Bessent noted that countries unable to finalise agreements by the deadline would revert to previously established tariff levels. “If you don’t move things along, then, on 1 August, you will revert to your 2 April tariff level,” Bessent said in an interview.

On the economic front, investor expectations for a near-term Fed interest rate cut have shifted considerably following June’s stronger-than-expected employment report. The US economy added 147,000 jobs in June, surpassing forecasts, while the unemployment rate fell to 4.1%. The strong data has led markets to reduce bets on a July rate cut, with focus now turning towards September as the earliest possible time for policy easing. Approval for implementing Trump’s “Big Beautiful Bill” after the Republican-controlled House of Representatives narrowly approved it has increased US fiscal risks. Market experts believe that his signature bill could raise the national debt by $3–$3.4 trillion over the next decade. Such a scenario would increase government interest obligations and may increase inflationary pressure on the economy. Conversely, market sentiment suggests that the Bank of England (BoE) will cut interest rates by 25 basis points, with two further cuts expected in November and December, which could help stabilise the pound.

The GBP/USD exchange rate is likely to remain sensitive to a combination of factors, including ongoing geopolitical developments, upcoming UK economic data releases, and evolving market expectations regarding potential adjustments to US Federal Reserve interest rates.

---

Stay Ahead in the Currency Game

Whether you're a daily FX trader or handle international transactions regularly, our 'Currency Pulse' newsletter delivers the news you need to make more informed decisions. Receive concise updates and in-depth insights directly in your LinkedIn feed.

Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!

---

Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.

---