The pound dropped to €1.13 on Tuesday, marking its weakest position against the euro in 20 months despite posting gains earlier in 2025. The 0.4% decline reflects mounting pressure on UK assets as Chancellor Rachel Reeves prepares to unveil tax increases in the November 26 budget.
"GBP is under significant pressure across the board," said Simon Phillips, Managing Director at No1 Currency. Analysts at Mizuho Bank project sterling could fall below $1.30, extending losses beyond its current $1.3086 level—down 0.5% on the day.
UK government borrowing costs climbed in parallel, with 30-year gilt yields rising 4 basis points to 5.21%, the highest since August. A Tuesday auction of inflation-linked bonds drew record demand of £69 billion for £4.25 billion in debt, surpassing March's £67.5 billion.
The currency movement benefits European businesses trading with the UK. A weaker pound makes British imports cheaper for eurozone buyers while increasing the euro value of UK revenue for continental companies. Tourism and real estate sectors see particular advantage as UK assets become more affordable for European investors.
Neil Wilson, analyst at Saxo Markets, warned of "fiscal instability risk" facing the UK government. Prime Minister Keir Starmer confronts internal party tensions as the budget approaches, with speculation around leadership challenges adding political uncertainty to economic concerns.
The pound's weakness contrasts with broader European market strength. The Stoxx 600 index reached a record 583.4 points, up 0.6%, while France's CAC 40 gained 0.7% and Germany's DAX rose 0.9%.
UK equity markets showed resilience despite currency pressure. The FTSE 100 closed at a record 9,911, up 0.1%, with intraday trading hitting 9,930. However, sterling's decline against the euro represents the largest gap in UK-eurozone exchange rates since early 2023, when post-Brexit trade adjustments were still settling.
For European manufacturers and retailers, the exchange rate shift improves competitiveness against UK rivals. German automotive exporters and French luxury goods makers gain pricing advantages in British markets, while Spanish and Italian agricultural exporters see improved margins on UK-bound shipments.