UK Pound Softens as Markets React to Reports Reeves May Drop Income Tax Hikes

The British pound came under pressure after reports suggested UK Chancellor Rachel Reeves may abandon previously expected income tax increases, according to analysis from ING. Markets had anticipated that higher income taxes would deliver a degree of fiscal tightening without adding to inflation, a view that had helped fuel a rally in UK gilts and supported expectations for Bank of England rate cuts in December and beyond.

The potential shift has introduced fresh uncertainty, with investors now questioning how Reeves intends to close the estimated £30 billion fiscal gap. One option reportedly under consideration is freezing income tax thresholds—a move that could generate similar fiscal tightening to raising tax rates and might be more palatable to markets.

At the time of writing, EUR/GBP was trading around 0.887. ING analysts warned that a sharp sell-off in gilts could widen the pound’s risk premium and push the cross above 0.890. Even so, the bank does not interpret the latest developments as a sign that Reeves is straying from her broader commitment to fiscal discipline. Historically, the government has acted quickly to reassure investors when gilt markets have reacted unfavourably.

While near-term downside risks for sterling have risen, ING expects the current EUR/GBP upswing to partially unwind as conditions stabilize.