One of the biggest news in overnight trading was this report by the Financial Times stating that the UK might drop plans for income tax hikes in the upcoming budget announcement. Amid increasing political uncertainty, this seems to be a last-ditch effort by Starmer and Reeves to try and win back some support. However, it comes at a big cost in sacrificing the already concerning UK fiscal status.
Make no mistake, this part of the Autumn Budget was supposed to be a given. So, it definitely marks a significant U-turn from what was pledged by the Labour party in their manifesto. That being said, lawmakers have been keeping rather tight-lipped about the whole thing for several weeks now and it seems to that they were preparing for this to happen.
In any case, markets are now responding in kind to the news as borrowing concerns and fiscal credibility starts to weigh. Sterling is down on the day, with the nudge lower in GBP/USD being relatively measured. The pair is down 0.3% to 1.3149 currently but EUR/GBP is seen up 0.4% to 0.8855 in rising to its highest levels since April 2023. Pain.
As we look to the European market open later, expect UK gilts to also come under pressure with yields set to jump much higher in the session ahead. And that could lead to extended pressure on the quid as we look towards the weekend.
As a reminder, the Autumn Budget will only be announced on 26 November so there's still about two weeks for Reeves to figure out the mess in all this.
