By Samuel Indyk
LONDON (Reuters) – The British pound continued its recent decline against the dollar and euro on Monday on investor concerns about Britain’s fiscal stability as Treasury yields rose for a sixth straight day.
The pound sterling fell as much as 0.7% against the dollar to $1.21, its lowest level since November 2023. It last hit $1.2124.
Against the euro, the pound fell 0.3% to 84.13 pence.
The pound has been in the crosshairs of global currency traders and British markets have been hit by rising bond yields, a move that began in the United States on concerns about rising inflation and fewer chances of the Federal Reserve cutting interest rates.
Strong US labor market data released on Friday added momentum to the rise in global bond yields, with money markets no longer fully pricing in any interest rate cut proposed by the Fed this year.
While higher yields often support the currency, in the UK, analysts expect higher borrowing costs could force the government to cut spending or raise taxes to meet fiscal requirements, which could weigh on future economic growth.
“Clearly something is starting to emerge and it’s not because of anything the UK has done in the last two weeks, but because of the sensitivity of the UK’s fiscal dynamics to interest rates and inflation,” said Dominic Bunning, head of G10 FX strategy at Nomura.
“The question is: If yields start to stabilize, will that be enough of a respite for the sell-off to start to slow down, or does it need a respite?”
The UK 10-year Treasury yield rose 1.5 basis points to 4.855% on Monday, slightly below last week’s high of 4.925%, the highest since 2008. It rose more than 24 basis points last week, the biggest weekly gain in a year. Bond yields change inversely to prices.
The yield on Britain’s 30-year bond rose to a 27-year high on Monday at 5.472%.
British Prime Minister Keir Starmer said on Monday that the government would stick to the fiscal rules set out in Finance Minister Rachel Reeves’ October budget and that he had full confidence in her. There was no immediate market reaction to his comments.
Reeves left herself only a compact margin for error to meet her goal of balancing public service spending with tax revenues by the end of the decade.
The recent rise in borrowing costs and frail UK economic growth data in the second half of 2024 make this target increasingly tough to achieve.
Attention this week will probably also focus on Wednesday’s UK inflation data.
Consumer prices are expected to rise 2.6% annually in December, in line with November, but core CPI will fall to 3.4% from 3.5%.
“The publication of December CPI data in the UK this week will be key to clarifying expectations around the risk of an interest rate cut next month,” said Jane Foley, senior currency strategy specialist at Rabobank.
“Raised expectations for a February BoE rate cut would likely point to a level of 1.20.”
Futures markets at the BoE’s February meeting are pricing in an interest rate easing of around 16 basis points, meaning the chance of a quarter-point rate cut is around 65%.
