Reeves Budget Fallout Punishes the Pound
The honeymoon for the Labour Treasury is officially over. On October 30, 2025, Chancellor Rachel Reeves delivered an Autumn Budget that fundamentally shifted the UK’s debt trajectory, and the currency markets have spent the last 48 hours delivering their verdict. Sterling is in retreat. As of the London close on October 31, 2025, the EURGBP cross has breached the 0.8780 level, marking a clear technical breakout that leaves the psychologically significant 0.9000 handle within reach. This is not a speculative wobble; it is a structural repricing of British risk.
The driver is a toxic combination of fiscal expansion and deteriorating Gilt market liquidity. According to the Office for Budget Responsibility (OBR) reports released alongside the budget, public sector net borrowing is now projected to remain £20 billion higher than March 2025 estimates. This fiscal slippage has forced 10-year Gilt yields to surge toward 4.54%, a level that would traditionally support a currency if it were driven by growth. Instead, this spike reflects a risk premium. Investors are demanding higher returns to hold UK debt as the debt-to-GDP ratio refuses to stabilize below 98%.
The Gilt Market Risk Premium and Sterling Contagion
Yields are up, but the Pound is down. This decoupling is the ultimate signal of fiscal distress. When yields rise because of inflation expectations or fiscal instability rather than productive growth, the currency typically collapses. The October 2025 Budget introduced a revised “Investment Rule” that essentially allows the government to borrow for capital projects by redefining how net debt is calculated. While the Treasury argues this will unlock long-term productivity, the Gilt market views it as a backdoor to higher leverage.
Internal Bank of England (BoE) dynamics are adding fuel to the fire. Governor Andrew Bailey and the Monetary Policy Committee (MPC) are now trapped. With headline CPI inflation ticking back up to 3.2% in the October report—largely due to persistent services inflation and rising energy costs—the BoE cannot easily cut rates to support the economy without risking a total sterling capitulation. Market participants are now pricing in a 5-4 split for the upcoming November interest rate decision, with growing fears that the BoE will be forced to maintain a restrictive 4.00% or 3.75% Bank Rate longer than the Eurozone, further choking UK domestic growth.
Monetary Divergence Favors the Euro
While the UK struggles with its fiscal identity, the European Central Bank (ECB) has provided a clearer, albeit sluggish, path for the Eurozone. Data from Reuters suggests that while the ECB is also in a cutting cycle, the relative stability of the German Bund spread against the periphery has made the Euro a preferred parking spot for capital fleeing the volatility of the London markets. The EURGBP pair has successfully completed a bullish triangle breakout on the daily timeframe, a pattern that technical analysts have been tracking since the “black hole” narrative emerged in late 2024.
The specific catalyst for the move to 0.8900 is the projected issuance calendar. The Debt Management Office (DMO) confirmed an aggressive schedule for the remainder of the 2025/26 fiscal year. Over-supply in the Gilt market is meeting tepid demand from overseas institutional investors, who are still haunted by the 2022 LDI crisis. Rachel Reeves has not repeated the amateurish mistakes of the Truss era, but her “slow-burn” fiscal expansion is proving equally difficult for the currency to swallow. The Pound is no longer being treated as a G7 core currency; it is trading like a high-beta emerging market asset, sensitive to every basis point of fiscal slippage.
Technical Targets and the 0.9000 Threshold
From a technical perspective, the EURGBP price action is unequivocal. The 0.8750 level, which served as a ceiling throughout the summer of 2025, has flipped to support. Sustained trading above this level targets the 0.8840 resistance zone, with the ultimate objective being the post-Brexit range high of 0.9000. Institutional sell-side desks are already revising their year-end forecasts, citing the “fiscal-monetary mismatch” as the primary reason for sterling weakness. If the Bank of England delivers a “dovish hold” in its November 7 meeting, expect the floodgates to open.
Traders must monitor the 2-year Gilt yield closely. If the front end of the curve begins to outpace the long end, a curve inversion will signal that the market expects a recession forced by the very taxes meant to fund Reeves’ investment pillars. The 6.7% increase in the National Minimum Wage to £12.21, effective earlier this year, has already begun to feed into the services CPI, creating a floor for inflation that the BoE cannot ignore. This prevents the central bank from providing the monetary relief the Treasury needs to offset its borrowing costs.
The next major milestone for the UK economy will be the January 2026 release of the Q4 2025 GDP flash estimates. If growth remains below 0.2%, the narrative will shift from “fiscal expansion for growth” to “debt-funded stagnation.” Watch the 0.8910 technical level; a weekly close above this point in December will confirm the Euro’s dominance for the first half of 2026.
