(Bloomberg) — The pound tumbled to its weakest level against the US dollar in more than one year as investors’ concerns over the UK fiscal and inflation outlook send the nation’s assets into a tailspin.
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Sterling fell as much as 0.7% to $1.2280, the lowest since November 2023. The move came even as the yield on the UK’s 30-year bond had soared to the highest level since 1998 this week, while that on 10-year tenors hit a level unseen since 2008.
“The pound could remain the preferred pressure valve for anxious investors who worry about the outlook of their UK portfolios,” said Valentin Marinov, head of Credit Agricole’s Group-of-10 FX strategy in London. “Markets are quite skittish at the moment. FX traders will continue to ‘milk’ the heightened FX volatility for whatever it’s worth.”
A sharp rise in UK yields is ringing alarm bells for some market participants. Typically, higher interest rates boost the appeal of a currency, so the drop this time can be indicative of capital flight as investors fret about persistent inflationary pressures and fiscal sustainability.
The moves have been dubbed a “micro” repeat of the UK market meltdown seen under former Prime Minister Liz Truss in 2022, which saw the pound slump to a record low, sent gilt yields spiraling higher and pushed pension funds to the brink of collapse.
While market structure has been strengthened to prevent a crisis of that scale happening again, traders fear the selloff could deepen without amendments to the government’s fiscal plans. The rise in borrowing costs is putting pressure on Chancellor of the Exchequer Rachel Reeves, as her £9.9 billion ($12.2 billion) of fiscal headroom dwindles.
–With assistance from Masaki Kondo and Ruth Carson.
(Adds strategist comment in third paragraph.)
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