Sterling Slides as Reeves Signals Tax Hikes and BoE Cut Bets Rise

Sterling remains under pressure near multi-year lows against both the euro and the dollar, as markets brace for a one-two hit of fiscal tightening and potential monetary easing. 

At an unscheduled press conference at 11 Downing Street, Chancellor Rachel Reeves confirmed that the government will raise income taxes in the upcoming November 26 Budget, effectively breaking Labour’s pre-election pledge. “As Chancellor, I have to face the world as it is, not as I want it to be,” she said, signalling a pragmatic shift toward fiscal restraint to stabilise public finances. Our detailed Budget preview had identified income tax threshold extensions and other revenue measures as highly likely given the £22-30bn fiscal shortfall.

The announcement accelerated selling in the pound and pushed gilt yields sharply lower. Markets now price roughly a 50% chance of a Bank of England rate cut this Thursday, and almost full probability by December. The logic is simple: higher taxes cool household spending and inflation, which in turn gives the BoE more room to ease. 

The combination of fiscal tightening, softer inflation readings, and slowing wage growth has deepened expectations that the Bank of England will soon offset the fiscal squeeze with lower rates. Analysts describe sterling as “the UK’s punching bag” this week, reflecting how rising tax burdens and weaker consumer confidence are weighing on sentiment. 

However, the weakness is not purely domestic. A global equity correction particularly in tech stocks, has reduced risk appetite, and sterling historically struggles when investors turn defensive. The dollar remains supported by safe-haven flows and fewer expected Fed rate cuts, while the euro has stayed firm ahead of the ECB’s policy decision. 

Globally, sentiment remains cautious. UK bond yields have fallen further as traders price in easier policy through early 2026, improving liquidity but lowering the pound’s appeal. Understanding how fiscal policy and central bank decisions interact helps explain this dynamic between tax hikes and rate cut expectations. Lower yields may help the Treasury by reducing borrowing costs, yet they also reflect growing concern over the UK’s growth outlook. 

Economists warn that the challenge runs deeper than the fiscal gap itself. “Blaming poor productivity on austerity misses the point,” said Simon French of Panmure Liberum. “Energy, planning, and regulation are far more important drivers. Public spending is already about 4% of GDP too high for sustainable growth.” 

Reeves’ Budget will therefore be judged not only on fiscal prudence but on whether it encourages productivity and private investment. For now, markets remain sceptical viewing tax hikes as a drag on both growth and competitiveness. 

Sterling’s selloff is understandable in the near term. Fiscal tightening, slower pay growth, and weaker global sentiment all point to continued pressure on the currency ahead of the Bank of England’s meeting. 

For clients with upcoming euro or dollar conversions, partial hedging remains prudent while sterling trades near the lower end of its range. The next 48 hours between the BoE’s decision and further Budget signals will determine whether this slide becomes a sustained trend or a short-term shakeout.