Pound sinks against euro and dollar as tax rises loom and growth slows

"The threat of higher taxes in next month's budget and concerns about slowing economic growth pushed the pound to its lowest level against the euro in more than two and a half years at one point on Wednesday. Sterling also slumped against the dollar as traders digested news that Rachel Reeves will need to fill a larger hole in the public finances when she puts together her budget plan, after a bigger-than-expected downgrade to the UK's productivity outlook."

"Analysts said the prospect of tax rises and spending cuts as part of a tough budget on 26 November had brought forward the likely date for when the Bank of England will cut interest rates from the current 4% to 3.75%. Until recently, financial markets had bet that the next rate reduction would be delayed until March, but investors are now fully pricing in a quarter-point cut in February."

"In the US, the Federal Reserve reduced its benchmark policy rate by a quarter point to the 3.75%-4% range on Wednesday after the conclusion of a two-day meeting. Jerome Powell, the Fed boss, voted with the majority for a more limited reduction than the Fed board member Stephen Miran a Donald Trump nominee who dissented in favour of a larger, half-point cut."

Threats of higher taxes and concerns about slowing growth pushed the pound to its weakest vs the euro in over two and a half years and also weakened it against the dollar. Rachel Reeves must fill a larger hole in public finances after a bigger-than-expected downgrade to the UK's productivity outlook. The pound fell to $1.32 and nearly 1.13 against the euro before settling at 1.14. The prospect of tax rises and spending cuts ahead of the 26 November budget brought forward expectations for a Bank of England quarter-point rate cut to February, a change echoed by Goldman Sachs. Lower rates tend to reduce currency valuations as investors seek higher yields elsewhere. UK inflation remaining at 3.8% for three months supports the view that inflation has peaked.

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