The British pound has taken a significant hit, plummeting to its lowest level in 14 months against the US dollar amid a global sell-off. This downturn was exacerbated by market anxiety over potential limitations on interest rate cuts by the US Federal Reserve, with investors now betting on just one rate cut this year. Sterling’s value dropped by as much as 0.7% to $1.211, marking it as the weakest performer among G-10 currencies against the dollar, as noted by City AM.
This decline in the pound’s value is not isolated but part of a broader trend of financial strain on UK assets, with sterling having lost over three percent in the last week alone. Chris Turner, an FX analyst at ING, has warned that the pound could further decline to $1.20, reflecting a market sentiment that is increasingly bearish towards the UK currency.
The turmoil in the UK’s financial markets comes amidst rising concerns about the government’s budget potentially fueling inflation, slowing growth, and prompting the Bank of England to reconsider its strategy on interest rate reductions. The situation has been compounded by soaring UK government bond yields, with the 10-year gilt yield rising to 4.87% and the 30-year to 5.53%, the latter hitting a 27-year high. This surge in yields indicates a market bracing for higher borrowing costs, which could force fiscal adjustments that might hinder economic growth.
The global context, particularly the strong US labor market data, has shifted investor expectations away from Federal Reserve rate cuts, adding pressure to the pound. Dominic Bunning from Nomura pointed out that the UK’s fiscal dynamics are highly sensitive to both interest rates and inflation, suggesting that the current market movements are more a reflection of external pressures than domestic policy decisions over the recent past.
Amid these economic challenges, Rachel Reeves, the UK Chancellor, returned from a trip to China only to face this financial storm. Her visit has been criticized by opposition parties, given the timing with the economic difficulties at home. The pound’s depreciation and the rise in borrowing costs underscore the precarious fiscal position the UK finds itself in, with long-term government bond yields reaching levels not seen since 1998, before slightly receding.
The GBP/USD pair has continued its downward trajectory, dropping to levels last seen in November 2023, around 1.2125. While the technical indicators like the RSI suggest the pound might be slightly oversold, caution is advised for bearish traders. The market’s concern over stagflation in the UK, alongside fiscal health worries, alongside a robust US dollar due to expectations of a pause in the Fed’s rate-cutting cycle, continues to weigh heavily on the pound.
This situation paints a picture of a currency under siege from both domestic fiscal policy concerns and international monetary dynamics, with investors and analysts closely watching for any signs of stabilization or further decline.
Sources:
https://www.msn.com/en-gb/money/other/pound-sterling-suffers-fresh-14-month-low-as-traders-pare-bets-on-fed-rate-cuts/ar-BB1rmvLy
https://uk.finance.yahoo.com/news/sterling-14-month-low-gilt-110314219.html
https://www.fxstreet.com/news/gbp-usd-price-forecast-dives-to-its-lowest-level-since-november-2023-amid-relentless-usd-buying-202501130524
https://www.standard.co.uk/news/politics/rachel-reeves-pound-fall-borrowing-costs-b1204403.html
https://x.com/AvonandsomerRob/status/1878860581522092518
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