07:59 AM EST, 11/14/2025 (MT Newswires) -- Sterling (GBP) has underperformed this week alongside the yen (JPY), with weakness intensifying at the end of this week, said MUFG.

It has resulted in EUR/GBP rising to a fresh high of 0.8864 overnight Thursday, wrote the bank in a note to clients. Sterling appears to be reacting negatively to media reports that United Kingdom Finance Minister Rachel Reeves has dropped plans to raise income tax as part of the Fall Statement in response to concerns the move would anger voters and further antagonise mutinous Labour members of parliament, according to the FT.

The decision to change tack was taken this week and communicated to the OBR on Wednesday. Without raising income tax, the government will now have to rely on a collection of other measures to plug the fiscal gap, which is estimated to be up to 30 billion pounds, stated MUFG. The FT notes that one alternative measure would involve cutting the thresholds at which people pay different rates of income tax while leaving the headline basic and higher rates of the tax unchanged.

Finance Minister Reeves is already expected to extend the freeze on income tax thresholds by another two years which could raise 8 billion to 10 billion pounds.

The initial negative reaction of sterling on Friday to the news is an indication that the government's fiscal tightening plans are viewed as less credible by market participants without an income tax hike, pointed out the bank. The decision to drop the income tax hike could be viewed as the Labour leadership prioritizing its popularity with the public and the stability of the Labour Party over doing what is best to restore confidence in the public finances.

Nevertheless, MUFG still expects the package of fiscal tightening measures to put a dampener on economic growth in the U.K. and create more room for the Bank of England to lower rates further. The releases this week of the weaker U.K. labor market and gross domestic product reports have reinforced negative sentiment towards sterling in the near term.