Fiscal policy plays a significant role in influencing currency pair movements by shaping a country’s economic outlook and investor confidence. Fiscal policy refers to government decisions on taxation, public spending, and budget deficits or surpluses. When a government increases spending or cuts taxes to stimulate economic growth, it can boost domestic demand and economic activity. If markets believe this growth will be sustainable, foreign investors may be attracted, increasing demand for the country’s currency and strengthening it against others.

However, expansionary fiscal policy often leads to higher budget deficits and increased government borrowing. If deficits grow too large, investors may worry about long-term debt sustainability and inflation risks. These concerns can weaken the currency, especially if confidence in government finances declines. As a result, the net impact on a currency pair depends on how markets perceive the balance between growth benefits and fiscal risks.

Fiscal tightening, such as spending cuts or tax increases, can have the opposite effect. While it may slow short-term growth, it can improve fiscal discipline and reduce debt levels. This often supports currency strength by signalling economic stability and responsible governance. Currency pairs react as traders compare the fiscal stance of two countries, favouring the currency of the nation with stronger and more credible fiscal management.

Fiscal policy also interacts closely with monetary policy. Large government spending programs may pressure central banks to raise interest rates to control inflation, further influencing currency values. Overall, fiscal policy affects currency pair movements by shaping growth expectations, inflation outlooks, debt levels, and investor confidence across economies.