Sterling extends slide as greenback rallies, gilt yields rise

By Samuel Indyk

LONDON (Reuters) -The British pound prolonged its latest drop in opposition to the greenback and the euro on Monday pushed by investor issues about Britain’s fiscal sustainability as gilt yields rose for a sixth straight day.

Sterling fell as a lot as 0.7% in opposition to the greenback to $1.21, its lowest degree since November 2023. It was final at $1.2124.

In opposition to the euro, the pound was down 0.3% at 84.13 pence.

The pound has been within the crosshairs of worldwide foreign money merchants with British markets hit by surging bond yields, a transfer which originated from america attributable to issues about rising inflation and decrease probabilities of fee cuts from the Federal Reserve.

Robust U.S. labour market knowledge launched on Friday added momentum to the upward march of worldwide bond yields, with cash markets not absolutely pricing in any fee lower from the Fed this 12 months.

Whereas increased yields typically assist the foreign money, in Britain analysts anticipate increased borrowing prices might drive the federal government to rein in spending or elevate taxes to fulfill its fiscal guidelines, doubtlessly weighing on future development.

“Clearly one thing is coming to a head and it isn’t due to something the UK has executed over the past two weeks, it is due to the sensitivity of the UK’s fiscal dynamics to charges and inflation,” mentioned Dominic Bunning, head of G10 FX technique at Nomura.

“The query for me is that if yields begin to stabilise, is that sufficient of a respite that this sell-off begins to sluggish or takes a little bit of a breather?”

Britain’s 10-year gilt yield was up 1.5 foundation factors on Monday at 4.855%, slightly below final week’s excessive of 4.925%, its highest since 2008. It rose over 24 foundation factors final week, its largest weekly rise in a 12 months. Bond yields transfer inversely to costs.

Britain’s 30-year yield rose to its highest degree in 27 years on Monday to five.472%.

British Prime Minister Keir Starmer on Monday mentioned the federal government would persist with the fiscal guidelines set out in finance minister Rachel Reeves’ October funds, and that he has full confidence in her. There was little fast market response to his feedback.

Reeves gave herself solely a small margin of error for assembly her goal of balancing spending on public serves with tax revenues by the top of the last decade.

The latest rise in borrowing prices and sluggish UK development knowledge within the second half of 2024 makes reaching that concentrate on more and more troublesome.

Consideration this week was additionally prone to be on British inflation knowledge on Wednesday.

Shopper costs are anticipated to have risen 2.6% yearly in December, in keeping with November, however core CPI is forecast to have moderated to three.4% from 3.5%.

“This week’s launch of the December UK CPI knowledge shall be essential in fine-tuning expectations across the threat of a fee lower subsequent month,” mentioned Rabobank senior FX strategist Jane Foley.

“Heightened expectations of a February BoE fee lower would doubtless put the GBP/USD 1.20 degree in view.”

Futures markets are pricing in round 16 foundation factors of easing on the BoE’s February assembly, implying round a 65% probability of a quarter-point fee lower.