The EUR/GBP exchange rate pulled back to 0.8825 (–0.19%) on Thursday after an early spike, as markets digested rising political tension around the UK’s upcoming budget and mounting pressure on Chancellor Rachel Reeves.
According to Rabobank, the latest developments are creating a more volatile environment for sterling. Reeves is reportedly trying to close an estimated £30 billion fiscal gap ahead of the November 26 budget.
Analysts warn that uncertainty over how this shortfall will be addressed — through tax increases, spending cuts, or additional gilt issuance — continues to weigh on UK assets.
Earlier this week, traders largely assumed Reeves would opt for an income-tax hike, a move seen as relatively market-friendly since it would reduce the need for extra government borrowing.
However, reports that both Reeves and Prime Minister Starmer may now drop the idea for political reasons triggered a sell-off in the gilt market and renewed pressure on the pound.
Rabobank argues that the Chancellor’s apparent change of course has damaged her credibility, and UK assets are responding accordingly. The bank also highlights that sterling’s reliance on external financing leaves it particularly exposed during periods of fiscal uncertainty. Political tensions within the Labour Party add another layer of instability.
With inflation still sticky and UK economic growth fragile, Rabobank believes the euro will maintain the upper hand.
For this reason, the bank keeps its forecast that EUR/GBP will continue to edge higher throughout 2026, supported by persistent UK fiscal uncertainty and the pound’s sensitivity to gilt-market volatility.