The British pound hit €1.13 on Tuesday, down 0.4% and marking its weakest position against the euro since April 2023. Against the dollar, sterling fell 0.5% to $1.3086 as markets braced for Chancellor Rachel Reeves' budget announcement on November 26.
Jordan Rochester at Mizuho Bank forecasts GBP could breach the $1.30 threshold. "Fiscal uncertainty is mounting," said Simon Phillips, managing director at No1 Currency. UK 30-year gilt yields climbed 4 basis points to 5.21%, the highest since August's 1998-level peak.
The pound's weakness stems from expectations of additional tax increases to address what Reeves calls a "black hole in public finances." UK inflation-linked bond auctions drew record demand—£69 billion in bids for £4.25 billion of debt, surpassing March's £67.5 billion record. Some 25% of UK gilts are tied to inflation, compared to roughly 10% in the US and France.
Neil Wilson, analyst at Saxo Markets, warned of "fiscal instability risk" affecting cross-border trade flows. European exporters face margin pressure as the stronger euro reduces competitiveness in UK markets. The euro zone's trade surplus with Britain, which reached €125 billion in 2025, could narrow if sterling continues weakening.
The Bloomberg Dollar Spot Index rose 0.1% after hitting 2022 lows, partially recovering on expectations around a new Federal Reserve chair appointment. This dollar stabilization provided limited relief to European currencies broadly.
UK political turmoil compounds currency volatility. Prime Minister Keir Starmer faces alleged leadership challenges, with Health Secretary Wes Streeting denying coup plotting while criticizing "toxic" Downing Street culture. Home Secretary Shabana Mahmood has also faced leadership speculation.
European equity markets showed resilience despite currency swings. The Stoxx 600 gained 0.6% to a record 583.4 points. France's CAC 40 rose 0.7% and Germany's DAX climbed 0.9%, suggesting investors are separating UK fiscal concerns from broader European growth prospects.
Kathleen Brooks, research director at XTB, noted gilt yield movements indicate markets are pricing in sustained UK borrowing costs. Mike Riddell at Fidelity Strategic Bond Fund called gilts the "top performer globally over recent months," though Julian Jessop at the Institute of Economic Affairs sees "no sign bond markets are rattled."
Currency traders are monitoring whether the pound's decline accelerates if the November 26 budget reveals larger-than-expected tax increases or spending cuts.