Investing.com – The recent rise in gold yields in the UK has highlighted delicate sentiment about the country’s fiscal situation, said Bank of America, which remains sterling’s “Achilles heel”.
At 04:35 ET (09:35 GMT), it was down 0.1% at 1.2299, near its lowest since October 2023, and heading for a weekly loss of around 1%.
While some of this movement can be attributed to changes in global fixed income instruments, sterling has been hit by a distinctive shift in the GBP risk premium, which Bank of America analysts say is a major disruptive factor for the pound, especially given its precarious position. in a memo dated January 9.
It is too early to tell whether the sterling sell-off is over, but the shift in bias and implied volume suggests the current bearish trend is susceptible to any improvement in sentiment as a result of stronger growth data.
That said, the rise in government bond yields, if it continues, increases the risk that the margin of leeway Chancellor Reeves had over her fiscal rules in the October Budget will have disappeared by the time the OBR publishes its spring forecasts around March.
“In our view, the chances of breaking or changing fiscal rules are low given the government’s commitment to fiscal stability,” Bank of America said. “We believe it is much more likely that the government will announce fiscal consolidation measures to meet the regulations and restore the reserve.”
“Consolidation is possible in the spring or earlier (potentially through spending cuts), and perhaps in a more significant way in the fall. We believe the bar for BoE intervention in the Gilt market is high and the comparison with the mini-budget is exaggerated.”
In addition to fiscal concerns, markets appear to be worried about persistent inflation, fueled further by worries about global tariffs, which the bank believes are justified. However, growth weakness, if it continues, will make it challenging for the BoE to compromise.
“For now, we expect the risk of inflation persistence to dominate the BoE’s thinking on growth concerns, keeping it on a path of gradual quarterly cuts. However, if we see sustained and strong economic growth and a deterioration in the labor market (the risks of which will increase if market movements force fiscal consolidation), the BoE will need to pay more attention to these risks and perhaps accelerate cuts.”
