The British pound suffered its biggest three-day drop in nearly two years this morning, as investors continued to unload British government debt and turn to the US dollar.
By early trading, the pound fell 0.9 percent against the dollar to $1.226, briefly touching its lowest level since November 2023. The currency has weakened 2 percent over the past three sessions, its largest decline since February 2023.
Economists attribute the pound’s decline in part to a global shift toward the dollar, driven by the prospect of interest rate cuts by the Federal Reserve and rising trade concerns as Donald Trump prepares to enter the White House on January 20. The dollar index, which measures the performance of the US currency against six other currencies, rose 0.15 percent in early trading.
Minutes from the Fed’s latest meeting, published last night, indicated that policymakers plan to gradually taper monetary support this year, giving the dollar more strength. The British pound also lost ground against the euro, falling 0.6 percent to 83.93 pence, its lowest level in almost two months.
Despite the weakness in sterling, the FTSE 100 index rose 0.51 per cent, or 42.15 points, to 8,293.17. However, the more domestically focused FTSE 250 index fell 0.78 per cent, or 156.61 points, to 19,795.63. Across the Atlantic, the S&P 500 and the Dow Jones Industrial Average closed higher, while Asian markets lost momentum overnight, with China’s CSI 300 falling 0.25 percent and Hong Kong’s Hang Seng falling 0.2 percent. . The European Stoxx 600 Index was broadly flat.
Yields on British government bonds continued to rise, with the interest rate on 30-year government bonds rising to 5.385 percent, the highest level since 1998. Meanwhile, the yield on the benchmark 10-year index rose by nine basis points early Before settling at 4.837. percent, the highest level since the 2008 financial crisis. Bond prices and yields are moving inversely, and the rapid upward movement indicates that investors are pricing in persistent inflation and rising interest rates.
Bond markets around the world have become increasingly jittery since the new year, amid fears that Donald Trump may impose tariffs on US imports, potentially sparking an inflationary trade war. Trump denied reports that his team is exploring a watered-down version of his tariff proposals, adding further momentum to the recent sell-off.
Typically, higher sovereign yields strengthen the currency by making domestic fixed-income assets more attractive. However, the recent decline in sterling highlights investor doubts about the UK government’s growth ambitions and its handling of public finances.
Rising yields have also put Chancellor Rachel Reeves’ fiscal rulebook under pressure, according to analysts. The jump in government bond prices has wiped out the £9.9bn reserve it had allowed itself, raising the possibility of future tax hikes or spending cuts to maintain fiscal targets. The UK’s annual debt servicing costs already exceed £100bn, and Reeves raised taxes by £40bn in October, including a £25bn increase in employers’ National Insurance contributions. Although it ruled out repeating a budget of this size, doubts surrounding the government’s policy still remain.
Analysts at Deutsche Bank noted that European bonds are leading the global market slide, with UK bonds in particular under pressure. “This rise in yields increases the risk that the government will violate its fiscal rules and be forced to announce further consolidation, while at the same time a weaker currency will increase inflationary pressures,” they said.
The Bank of England, for its part, expects data next week to show that inflation fell to 2.5 percent in December, from 2.6 percent the previous month, but policymakers will be watching the current turmoil in the bond market closely for any signs of that. . The outlook may change.