You are the best judge of standards within your particular area of expertise.
On the one hand, you must remember that this is an undergraduate, not a graduate, thesis; but, on the other hand, you should not underestimate the ability of an honors student to produce truly superior work when challenged to do so.
When it comes to setting a grade, you will obviously want to consider seriously the judgments of the two readers, but the thesis director is the instructor of record, and, ultimately, the determination of a grade is your responsibility.