Pound weakens as Rachel Reeves set to reveal public finances shortfall

The pound has weakened against the US dollar as investors showed caution ahead of an announcement by the Chancellor of the Exchequer, which is expected to address a £20bn public spending black hole, and the Bank of England’s upcoming interest rate decision.

Sterling’s value dipped by 0.4% against the US dollar on Monday morning, at about 1.281, hitting a new near three-week low.

The pound was also down about 0.15% against the euro at 1.1835, suggesting some caution among traders.

Currency movements typically indicate the reaction of financial markets to events that could impact the wider economic landscape.

Later on Monday, Rachel Reeves is expected to announce plans to plug a hole in the UK’s public spending that she will say was left by the previous government.

Reeves will say that the former government overspent this year’s budgets by billions of pounds by making unfunded promises.

However, she will try to allay any fears about the economy by pledging to “restore economic stability”.

Meanwhile, investors are also reacting to expectations that the Bank of England could decide to cut interest rates on Thursday for the first time in more than four years.

Financial markets are more or less split over whether policymakers will decide it is the right time to reduce rates or wait until later in the year.

Economists have also stressed that the decision could be a close call, with the Bank wanting to be certain that inflation is under control before it can start to ease monetary policy.

Earlier this month, the pound rallied to hit its highest value against the US dollar in a year.

A group of economists at ING said this was driven more by the American currency weakening, as well as political turbulence in France making waves overseas.

The upcoming interest rate decision could “therefore present a headwind to the resurgent pound”, ING cautioned.

Elsewhere, the UK’s FTSE 100 index surged by 1% on Monday morning amid the prospect of lower rates.