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

Prospect of a tough budget is thought to have brought forward the likely date for a cut in interest rates to 3.75%

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 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.

The pound fell to $1.32 against the dollar, hitting the lowest level since early August. The UK currency fared even worse against the euro, slumping to almost €1.13, the lowest level since April 2023.

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%.