The Pound suffered a sharp drop on Wednesday as investors braced for an economic hit in Rachel Reeves’ forthcoming Budget.
Sterling’s downturn came as the UK’s fiscal watchdog looks set to hand a hefty downgrade to the country’s productivity growth.
On Wednesday morning, the pound fell 0.4 per cent against the Euro to 1.13 – a level not reached since May 2023. In the afternoon, sterling fluctuated between 1.13 and 1.14.
Against the dollar, the pound was down 0.4 per cent to a three-month low of 1.32.
David Morrison, senior market analyst at Trade Nation, said: “Investors are cutting their exposure to the British pound ahead of Chancellor Rachel Reeves’ budget next month, and as the UK government buckles uselessly under the weight of a series of bad headlines.”
Analysts are pointing to a £20bn expansion in Reeves’ fiscal blackhole as a result of the Office for Budget Responsibility’s expected 0.3 per cent downgrade.
The Institute for Fiscal Studies (IFS) have said that every 0.1 per cent downgrade would result in public sector net borrowing increasing by £7bn in 2029-2030.
Labour to break manifesto?
Reeves has began to signal more clearly tax rises are on the way in the Budget, telling an audience of top investors in Riydah that the government was “looking, of course, at tax and spending to ensure” resilience against futrure shocks.
The Chancellor wrote in The Guardian on Wednesday that she was “determined not to simply accept the forecasts”.
The Labour government have attempted to offshore the blame of the downgrade to the previous Conservative governments, citing austerity, Brexit and the pandemic.
In its 2024 manifesto, Labour pledged to not raise taxes on “working people” – referring to income tax, VAT and national insurance.
During Prime Minister’s Questions on Wednesday, Keir Starmer ducked a question on whether the government would break the manifesto pledge as it looks to plug the fiscal gap at the Budget.
The Prime Minister said the government will “lay out our plans” on November 26.