The pound has fallen sharply and UK borrowing costs have risen after Sir Keir Starmer sidelined Rachel Reeves in a government reshuffle.

Sterling fell by as much as 1.3pc against the dollar to less than $1.34 on Tuesday morning, while Britain’s 30-year borrowing costs hit their highest level since 1998.

The market moves increase the pressure on Sir Keir Starmer and his Chancellor ahead of next month’s make-or-break Budget.

Chris Beauchamp, chief analyst at stockbroker IG, said rising borrowing costs “complicate matters enormously for the Government, in turn signalling that tax rises are coming in the autumn Budget”.

Borrowing costs have been steadily rising for weeks, but the latest increase comes after the Prime Minister appointed three financial experts to his top team on Monday, a move seen as undermining Ms Reeves after a series of policy reversals and missteps at Number 11.

Sir Keir notably poached Darren Jones, Ms Reeves’s former deputy, to the new role of Chief Secretary to the Prime Minister.

Yvette Cooper, the Home Secretary, on Tuesday insisted Ms Reeves had not been “sidelined”, claiming the situation was “quite the reverse”.

She said: “I think the Prime Minister and the Chancellor have always worked extremely closely together and continue to do so.”

The pound was the worst performer among the world’s major currencies on Tuesday, dropping by as much as 0.6pc against the euro to €1.15.

The yield on 30-year UK gilts – a benchmark for the cost of servicing Britain’s national debt – climbed 0.05 percentage points to 5.69pc, a 27-year high.

While borrowing costs are rising around the world, it is unusual for a currency to weaken at the same time.

Mohamed El-Erian, chief economic adviser at Allianz, said the UK was behaving “similar to what is more usual for developing countries, highlighting an already difficult fiscal and growth outlook”.

Economists have warned that Ms Reeves faces a fiscal black hole of as much as £50bn in the autumn. Meanwhile, growth remains weak.

While borrowing costs are high, the appetite for UK government debt remains strong. The Treasury was on Tuesday set to raise a record-breaking £14bn through the sale of 10-year gilts after attracting significant interest from investors.

It suggests investors still see UK debt as attractive despite the country’s fiscal woes, as rivals on the continent like France are gripped by their own crises.

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