UK data released on Friday indicated a net public sector surplus of £15.4bn for January, falling short of the £20bn forecasted by the Office for Budget Responsibility. This situation increases the likelihood that Chancellor Rachel Reeves may need to reduce spending to avoid tax hikes in her upcoming Spring Statement on 26 March.

The expected fiscal flexibility has diminished due to rising gilt yields. GBP/USD is anticipated to dip below 1.25 in March, influenced by potential lower spending and changes from the Bank of England.

The UK data calendar is clear this week, directing attention to upcoming remarks from Bank of England representatives, including two dovish members today and Chief Economist Huw Pill tomorrow.

A lower-than-expected public sector surplus means that Rachel has less room to manoeuvre ahead of next month’s Spring Statement. Borrowing costs are already climbing, as reflected in rising gilt yields, so filling the gap with more debt would only add to the pressure. On the other hand, increasing taxes would likely be unpopular, particularly given the broader economic slowdown. That leaves spending cuts as the most likely option.

For traders, this creates a scenario where the pound could soften further. Expectations that GBP/USD may slip below 1.25 in March are tied to both the potential for reduced fiscal spending and any dovish signals from the Bank of England. If markets start to price in a more accommodative stance from policymakers, sterling could weaken even more. Rising borrowing costs make aggressive rate cuts less attractive, but if economic growth looks weak, the central bank may still be inclined to loosen policy sooner rather than later.

This week’s UK economic schedule is empty, shifting attention to how members of the central bank guide expectations. Two policymakers seen as supportive of easier financial conditions are set to speak today, meaning markets may lean towards a softer view if their comments reinforce expectations of rate cuts. Tuesday brings remarks from Huw, and as Chief Economist, his words carry more weight. If he signals patience on loosening policy, the pound may find some support, but any mentions of downside risks to growth could reinforce a weaker trend.

For those navigating derivatives, pricing in possible moves based on policy signals will be important. If markets take today’s speeches as dovish, sentiment could push sterling lower before traders even hear from Huw. However, a stronger-than-expected stance from him may curb any early losses.

With fiscal and monetary policy decisions shaping up to pressure the pound, it’s a week where attention to detail matters. Movements may not be driven by data, but by how policymakers position expectations going forward.