The FTSE 100 (^FTSE) lagged behind its European peers on Thursday as traders continue to digest the aftermath of Wednesday’s budget announcement. Meanwhile, the pound (GBPUSD=X) traded as high as $1.3268 early on Thursday morning, hitting its highest since 29 October, before retreating again.

It comes amid relief that chancellor Rachel Reeves doubled her headroom to hit her fiscal rule for a balanced current budget in 2029-30, from £9.9bn to almost £22bn. This also pushed down UK borrowing costs on Wednesday.

This is despite the chancellor putting up taxes by £26bn after vowing last year that she would not “come back for more” when raising taxes by £40bn. Labour’s manifesto also promised not to raise taxes on working people.

She admitted she was “asking working people to pay a little bit more” but insisted she had “kept that contribution to an absolute minimum,” blaming US president Donald Trump’s tariffs and former prime minister Liz Truss.

Andrew Wishart, economist at Berenberg, said: “Taking the chance offered by a helpful official forecast to avoid hard decisions has increased the chancellor’s and prime minister’s chance of political survival.

Read more: The autumn budget explained in five charts

“The fall in yields and strengthening of the pound is probably more due to the waning of political risk rather than any changes to official forecasts or the policy package.”

On the back of the budget speech, a cut in UK interest rates next month is now a near-certainty, with money markets showing 90% odds that Threadneedle Street lowers the base rate by a quarter of a percentage point at its 18 December meeting.

This is up from around 85% earlier this week, before the chancellor’s budget. The City is also predicting over 60 basis points of cuts to Bank Rate by the end of next year, which indicates two quarter-point cuts are fully priced in with the possibility of a third.

Nigel Green, CEO of DeVere Group, said: “We now expect the Bank of England to cut rates in December and then follow with three more reductions in 2025. The data now supports it, the fiscal picture allows it, and the growth outlook increasingly demands it.”

  • London’s benchmark index (^FTSE) was 0.1% down in early afternoon trade.

  • Germany’s DAX (^GDAXI) rose 0.3% and the CAC (^FCHI) in Paris headed 0.1% into the green.

  • The pan-European STOXX 600 (^STOXX) was hovering around the flatline.

  • Wall Street is closed for Thanksgiving. On Wednesday US stocks rallied as anticipation mounted about another Fed rate cut in two weeks’ time, with a further boost from solid data.

  • The pound was muted against the US dollar (GBPUSD=X) at 1.3233, briefly touching a one-month high earlier in the morning.