Pound sterling continues to sink as UK economy ‘clearly on very shaky ground’
Pound sterling has continued to sell off this morning, and UK government bond yields have ticked higher as UK risk assets remain under pressure.
The pound fell below $1.23 against the dollar in early trade and is currently down 0.7 per cent against the dollar and 0.6 per cent against the euro.
Meanwhile, the domestically focused FTSE 250 index opened lower 0.6 per cent.
The day after 30-year government bond yields reached their highest this century, yesterday 10-year government yields jumped to 4.82 per cent, the highest since August 2008.
“We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed,” said Michael Brown, senior research strategist at Pepperstone.
The pound also fell against all major currencies yesterday, plummeting more than one per cent versus the dollar to its lowest in more than a year at $1.238.
Derivatives point to the weakness in the pound continuing, with one-week sterling to dollar risk reversals falling to the most negative since early November, which implies puts trading at the biggest premium over calls since US election day.
“In part, this move is shadowing a rise in US bond yields, driven by signs of a still strong US economy alongside indications of persistent inflation that are prompting investors to review expectations for two rate cuts in the year ahead,” explained Lindsay James, investment strategist at Quilter Investors.
“Term premium, the additional yield investors demand for lending long-term money, has also been on the rise, with one factor being the pure level of uncertainty around the future path of inflation and the productive potential of the economy.”
With the UK enduring stickier inflation than most other developed economies, the Bank of England has been towing a more hawkish line than most of its peers.
However, a key factor continues to be the size of the bond sales by both the UK government and the Bank of England.
The government’s bond issuance is expected to reach almost £300bn this year, driving up yields even as the economy begins to show cracks.
Stagnant growth and the continuing gilt sell-off has “all but wiped out Chancellor Reeves’ fiscal headroom, which was already incredibly slim at around £10bn,” noted Brown.