Pound Sterling tumbles as spike in UK gilt yields reflect weak UK economic outlook
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The Pound Sterling faces severe selling pressure as a sharp spike in UK gilt yields mirrors a weak economic outlook. Fears of persistent UK inflation and Trump’s tariff hike plans have pushed UK bond yields to their highest levels since 1998. Renewed US inflation fears have forced Fed officials to turn cautious on interest rate cuts. The Pound Sterling (GBP) underperforms its major peers on Thursday due to a significant jump in the United Kingdom (UK) government’s borrowing costs. An intense sell-off in UK bonds has pushed 30-year gilt yields to 5.36%, the highest level since 1998. Typically, higher UK gilt yields boost the appeal of the British currency. However, the correlation is not legitimate at this point as a resurgence in inflationary pressures and potentially inflationary United States (US) President-elect Donald Trump policies have weighed on the UK’s economic outlook. This has led to doubts over whether Chancellor of the Exchequer Rachel Reeves will fulfill its fiscal rules, including a non-negotiable commitment to avoid borrowing for day-to-day spending. However, a British finance ministry spokesperson responded that “No one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances,” Reuters reported. A sudden spike in UK bond yields has raised concerns about whether the country will remain committed to funding public services and growth-boosting investments through bond selling without further raising taxes. Meanwhile, the Bank of England (BoE) doesn’t appear to cut interest rates at a faster pace ahead as high inflation due to stubborn wage growth remains a limiting factor. Traders price in roughly 60 basis points (bps) interest rate reduction by the BoE this year, suggesting that there will be more than two rate cuts. However, analysts at Goldman Sachs said in a note…
Filed under: News - @ January 9, 2025 8:21 am