Sterling Slides After UK Chancellor Signals Tax Rises Ahead of Budget

The British pound dropped around 0.5% to $1.3072 after Finance Minister Rachel Reeves delivered a rare pre-budget speech, warning of “hard choices” and hinting at broad tax increases to plug a £20-30 billion fiscal gap. At the same time, UK 10-year gilt yields eased as markets priced in tighter fiscal policy and potential sooner-than-expected interest-rate cuts.

What’s Behind the Move

• Reeves reaffirmed that the government will adhere to its fiscal rules, signalling a shift away from previous manifesto pledges and preparing the market for tax hikes.

• The timing of the speech ahead of the Bank of England rate decision added to investor caution, with traders revising down expectations for UK growth and revising rate-cut timing.

• Global risk sentiment also weighed on sterling, as equity markets pulled back amid concerns over stretched valuations and macro uncertainty.

Market Implications

• The pound’s weakness reflects concerns that higher taxes could weigh on consumption and growth, potentially prompting the Bank of England to ease policy sooner.

• UK financial stocks and bond yields could remain under pressure if fiscal tightening dampens growth expectations.

• For FX traders, this development highlights the interplay between fiscal policy signals and currency moves, suggesting a tilt toward more cautious UK growth assumptions.

What to Watch Next

• The official UK budget (scheduled later this month) for details on tax-hike scope, spending plans and growth revisions.

• Bank of England commentary on how fiscal policy developments affect its monetary path.

• UK economic data, especially consumer spending and business investment, for early signs of a slowdown.