The British pound fell to its lowest level in over a year on Thursday, driven by declining confidence in the UK’s fiscal outlook as borrowing costs surged.
At 08:10 ET (13:10 GMT), GBP/USD dropped by 0.7% to $1.2285, marking its weakest point since November 2023. Meanwhile, EUR/GBP rose by 0.5% to 0.8385, reaching its highest level since September 2023.
The pound is on track for its largest three-day drop in nearly two years, coinciding with UK government bond yields hitting multi-year highs.
Bond Yields Soar, Raising Concerns Over Economic Recovery
Normally, higher bond yields would support the currency. However, concerns are growing that the rising costs of financing UK government debt may force additional tax hikes or spending cuts, which could slow economic recovery.
The Labour government recently committed to not borrowing for day-to-day spending, but this pledge is now in question.
No Immediate Intervention, Says Treasury Minister
Speaking in the House of Commons, Treasury Minister Darren Jones stated that there was “no need for an emergency intervention” in the financial markets. He assured that markets were “functioning in an orderly way” and that the shifts in government borrowing costs were driven by a mix of international and domestic factors.
Government Intervention Worries Foreign Exchange Traders
Despite reassurances, the mere mention of potential government intervention has unsettled foreign exchange traders.
Analysts at ING explained that the global bond market sell-off deeply affected the UK’s gilt market, leading to a widening of gilt spreads. This, in turn, prompted investors to reduce their sterling positions.
“Investors had believed that the pound could withstand the strong dollar trend, but the market’s reactions suggest otherwise,” ING analysts noted.
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