UK pound under pressure as Reeves may scrap income tax hikes
Investing.com -- The British pound is facing downward pressure following reports that UK Chancellor Rachel Reeves might abandon plans for income tax increases, according to ING.
The potential policy shift is creating uncertainty in markets that had previously anticipated income tax hikes would provide necessary fiscal tightening without fueling inflation.
This expectation had supported a rally in UK government bonds (gilts) and created a favorable outlook for Bank of England rate cuts in December and beyond.
Markets are now questioning how Reeves plans to address the £30 billion fiscal gap without income tax adjustments. Among the options reportedly being considered is freezing income tax bracket thresholds, which would achieve similar fiscal results as raising rates on specific brackets and might be positively received by markets.
At the time of writing, EUR/GBP is trading at 0.887. ING analysts suggest that if gilt markets open with significant losses, the risk premium on the pound could increase further, potentially pushing the pair above 0.890.
Despite these immediate concerns, ING does not view the current situation as indicating a fundamental shift in Reeves’ commitment to fiscal prudence.
The bank notes that past unwanted gilt movements have typically triggered government reassurances to calm markets. While downside risks for the pound have increased, ING still expects the EUR/GBP rally to partially reverse.
