Pound Sterling Bounces Against Euro and Dollar on Tax U-Turn

Published: Saturday, 15 November 2025 23:00 BST - Written by David Woodsmith

STORY LINK Pound Sterling Bounces Against Euro and Dollar on Tax U-Turn

The Pound Sterling was subjected to sharp selling against the Euro and Dollar in Asian trading on Friday amid chatter that Chancellor Reeves had abandoned plan to raise income tax in the late-November budget.

Entering the weekend, the Pound to Euro exchange rate was quoted 1.13366, while the Pound to Dollar exchange rate traded at 1.31743.

This speculation triggered fears that the budget deficit would not be addressed adequately with a sharp sell-off in UK bonds and UK equities which hurt the Pound.

The 10-year gilt yield jumped to highs at 4.55% from yesterday’s close of 4.44% and the Pound was subjected to strong selling with the Pound to Euro (GBP/EUR) exchange rate slumping to fresh 30-month lows just below 1.1280.

According to ING; “GBP downside risks have suddenly increased.”

Key support is at 1.1280 and a sustained drop below this level would risk losses to at least 1.1140.

The move inevitably sparked talk that the government had decided it was politically impossible to break an election pledge.

MUFG noted; “The decision to drop the income tax hike could be viewed as the Labour leadership prioritizing their popularity with the public and the stability of the Labour party over doing what is best to restore confidence in the public finances.”

Bank of Singapore currency strategist Moh Siong Sim commented; "A weakening of fiscal resolve on the back of political uncertainty is not good news for the pound."

After the European open, sources suggested that the plan to drop income tax hikes was due to an improved forecast outlook.

Gilts attempted to rally while the Pound briefly pared losses with a move to 1.1330, but there was very choppy trading with a surge in uncertainty and Pound jitters.

Media reports suggest a number of alternatives are under consideration and volatility will remain a key threat with Sterling markets inevitably on edge.

XTB’s research director Kathleen Brooks commented; “Bond market volatility is not what the chancellor wants to see with less than two weeks to go before the budget.”

Reports suggest that income tax thresholds could be frozen for longer or cut with various other taxes increased.

According to ING there will still be a commitment to stability; “Ultimately, this does not look like enough of an indication that Reeves is willing to radically change her fiscal prudence commitment. And we saw in the past how unwanted gilt moves can trigger some reaction by the government aimed at reassuring markets. So even if downside risks for the pound have increased, we still expect the EUR/GBP rally to be partly reversed.”

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TAGS: Pound Dollar Forecasts Pound Euro Forecasts