Pound Weakens as Reeves’s Tax U-Turn Reignites Budget Jitters

The pound underperformed its major peers on Friday as reports that Chancellor of the Exchequer Rachel Reeves is dropping plans to raise income tax at this month’s budget reignited concerns over the nation’s finances.

Sterling fell as much as 0.5% to $1.3127, and is on track for its third weekly decline in four. Any signs the upcoming budget may lack clarity or discipline could further weigh on the currency.

The pressure is also evident in options markets. The pound is heading for a fourth weekly decline against the euro and options traders added fresh downside protection on Friday. So-called risk reversals, a barometer of market positioning, show that bearish sentiment on the sterling rose to its highest level since early July, signaling mounting concerns that the UK currency could extend its slide into the budget.

Where the pound goes next largely depends on whether Reeves can deliver more convincing strategic plans on how to fix the funding gap, according to Kaitlyn Buhariwalla , a strategist at Westpac Banking Corp. “That’s looking unlikely so tilting more towards a bearish outlook right now,” she said.