Markets have largely priced in Chancellor Reeves’ expected mix of tax hikes and fiscal restraint, pushing gilt yields and the pound lower. While political noise around her rental license lapse briefly weighed on sentiment, PM Starmer’s backing eased concerns. Analysts see EUR/GBP rising to 0.880, though a surprise resignation would risk renewed gilt and FX volatility, ING's FX analyst Francesco Pesole notes.

Markets price in Reeves’ tax-heavy, non-inflationary Budget

"In our baseline scenario, Chancellor Rachel Reeves delivers a combination of tax hikes whilst avoiding the more inflationary measures. That has gradually been priced in by markets via some dovish BoE repricing, lower gilt yields and a weaker pound. Our post-budget EUR/GBP target is 0.880 on the back of that."

"One source of risk for gilts and GBP, even before any clearer details on the Budget emerge, is from opposition calls on Reeves to resign following her admission of failing to obtain a required license to rent her home. The story slightly deflated yesterday as PM Starmer fully backed Reeves and a real estate agency took the blame for the error."

"In July, when Reeves appeared close to leaving her post, gilt yields spiked. Markets are wary that a change in Chancellor could herald more relaxed fiscal rules and additional borrowing, at a time when gilt issuance remains elevated. A surprise resignation, which looks unlikely, would, in our view, cause elevated volatility in gilts and the pound."