Sterling endured its sharpest three-day decline in almost two years this morning, as investors continued to offload UK government debt and flock to the US dollar.
By early trading, the pound had slipped 0.9 per cent against the dollar to $1.226, briefly touching its lowest level since November 2023. The currency has weakened by 2 per cent over the past three sessions, its biggest drop since February 2023.
Economists attribute sterling’s slide in part to a global shift towards the dollar, propelled by the prospect of fewer interest rate cuts from the Federal Reserve and mounting trade concerns as Donald Trump prepares to enter the White House on 20 January. The dollar index, which tracks the greenback against six peers, rose by 0.15 per cent in early trading.
Minutes from the Fed’s most recent meeting, published last night, hinted that policymakers plan to scale back monetary support gradually this year, giving the dollar further strength. Sterling also lost ground against the euro, dropping by 0.6 per cent to 83.93p, a near two-month low.
Despite sterling’s weakness, the FTSE 100 climbed 0.51 per cent, or 42.15 points, to 8,293.17. However, the more domestically focused FTSE 250 dipped 0.78 per cent, or 156.61 points, to 19,795.63. Across the Atlantic, the S&P 500 and Dow Jones industrial average both closed higher, while Asian markets lost momentum overnight, with China’s CSI 300 slipping 0.25 per cent and Hong Kong’s Hang Seng down 0.2 per cent. The pan-European Stoxx 600 was broadly flat.
Yields on UK government bonds continued their ascent, with the rate on 30-year gilts edging up to 5.385 per cent, its highest since 1998. Meanwhile, the yield on the 10-year benchmark rose by nine basis points early on before settling at 4.837 per cent, still its loftiest level since the 2008 financial crisis. Bond prices and yields move inversely, and the rapid upward movement suggests that investors are pricing in more persistent inflation and higher interest rates.
Bond markets worldwide have become increasingly jittery since the new year, amid fears that Donald Trump could introduce tariffs on US imports, triggering an inflationary trade war. Trump has denied reports that his team is exploring a watered-down version of his tariff proposals, which added further impetus to the latest sell-off.
Ordinarily, rising sovereign yields strengthen a currency by making local fixed-income assets more attractive. However, the pound’s recent decline highlights investor scepticism over the UK government’s growth ambitions and its handling of public finances.
Rising yields have also placed Chancellor Rachel Reeves’s fiscal rulebook under strain, according to analysts. The jump in gilt rates has nearly erased the £9.9 billion buffer she had allowed herself, increasing the likelihood of future tax increases or spending cuts to maintain fiscal targets. The UK’s annual debt servicing costs are already in excess of £100 billion, and Reeves lifted taxes by £40 billion in October, including a £25 billion rise in employers’ national insurance contributions. While she has ruled out repeating a budget of that scale, lingering uncertainties around government policy remain.
Analysts at Deutsche Bank noted that European bonds are leading the global market slide, with UK gilts in particular coming under pressure. “This rise in yields is adding to the risk that the government will breach its fiscal rules and have to announce further consolidation, whilst the weaker currency will add to inflationary pressures at the same time,” they said.
The Bank of England, for its part, is expecting next week’s data to show that inflation edged down to 2.5 per cent in December, from 2.6 per cent the previous month, but policymakers will be watching the current bond market turmoil closely for any signs that the outlook may be shifting.
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Sterling tumbles as bond yields soar, fanning fears over UK public finances