Sterling tumbles against the euro and dollar amid fears of tax hikes, spending cuts, and slowing growth.
The pound slumped to its lowest level against the euro in more than two and a half years on Wednesday, as markets grew jittery over the prospect of higher taxes in next month’s budget and a sharp slowdown in the UK’s economic growth.
Sterling also weakened against the dollar, falling to $1.32—its lowest point since early August — before recovering slightly. Against the euro, the UK currency fared worse still, briefly dipping to €1.13, a level not seen since April 2023, before closing at €1.14.
The sell-off came as traders digested warnings that Chancellor Rachel Reeves will face a deeper-than-expected hole in the public finances after a downgrade to the nation’s productivity outlook. Analysts said her options for the 26 November budget now likely include a painful mix of tax rises and spending restraint.
“The fall in sterling is largely driven by the view that Reeves will hold the line on the budget—perhaps being forced to raise taxes or cut spending a little more than she’d planned,” said Chris Turner, global head of markets at ING. “But by holding the line on the fiscal rules, the Bank of England might have to cut rates a little earlier than markets had priced in.”
Markets Bring Forward Rate-Cut Bets
Until recently, most investors had expected the Bank of England to wait until March to lower interest rates. But financial markets are now fully pricing in a quarter-point cut in February — and some analysts believe the move could come as early as next week.
Goldman Sachs on Wednesday revised its forecast, predicting the bank will trim the base rate from 4% to 3.75% at its upcoming meeting. Threadneedle Street is understood to see inflation as having peaked, with the annual rate holding at 3.8% for three months.
Lower rates typically weigh on a currency as investors move capital to jurisdictions offering higher returns. Turner said the probability of a UK rate cut next week has jumped from 15% to 35%, reflecting growing belief in an earlier easing.
“So the sterling sell-off is not about Reeves’s credibility or the fiscal hole,” he added, “but more about the adjustment toward tighter fiscal and looser monetary policy—a combination that’s typically negative for a currency.”
Reeves’ Tightrope and the Global Context
Reeves’s firm stance on controlling borrowing has, however, improved the UK’s credibility in debt markets, lowering its perceived risk as a borrower. Analysts said that balance—fiscal discipline at home, easier money policy abroad—leaves sterling caught between opposing forces.
Across the Atlantic, the Federal Reserve reduced its benchmark rate by a quarter point this week, to the 3.75%-4% range. Fed Chair Jerome Powell backed the modest cut, while Trump-appointed board member Stephen Miran dissented, calling for a steeper half-point reduction.
The US president has urged deeper rate cuts to stimulate growth, but most analysts expect American rates to remain higher than the UK’s in the medium term — making dollar assets more attractive and further pressuring the pound.
Falling Prices, Softer Tone Ahead
Adding to the dovish mood, new figures from the British Retail Consortium showed the sharpest fall in food prices since the pandemic. Ipek Ozkardeskaya, senior analyst at Swissquote, said the data would be “a boost for the doves” on the Bank’s monetary policy committee, reinforcing arguments for earlier rate relief.
“The inflation picture is easing, and with growth weakening, the Bank may have little choice but to move sooner rather than later,” she said.
