Pound sterling continues to fall as the UK economy is ‘clearly on very shaky ground’.

Thursday, January 9, 2025 9:20 AM | Updated: Thursday, January 9, 2025 2:07 PM

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The pound continues to sell off this morning and UK government bond yields are higher as UK risk assets remain under pressure.

The pound fell below 1.23 against the dollar in early trading, and is currently down 0.7% against the dollar and 0.6% against the euro.

Meanwhile, the domestically focused FTSE 250 index showed a 0.6% decline.

The day after the yield on 30-year Treasury bonds hit the highest of this century, the yield on 10-year Treasury bonds soared to 4.82% yesterday, hitting the highest since August 2008.

“We haven’t reached the Truss/Kwarteng stage yet, but the situation is clearly in a very volatile state,” said Michael Brown, chief research strategist at Pepperstone.

The pound also fell against all major currencies yesterday, plunging more than 1% against the dollar to $1.238, its lowest in more than a year.

Derivatives point to the pound continuing to weaken, with the one-week dollar risk reversal against the pound falling to its most negative level since early November. This means it is trading at the largest premium to the call since Election Day in the United States.

Read more Investors are 'losing confidence' in UK economy

“In part, these moves are overshadowing the rise in U.S. bond yields as signs that the U.S. economy remains strong and persistent signs of inflation have investors weighing expectations of another two rate cuts in the future,” said Lindsay James. explained. Investment strategist at Quilter Investors.

“The term premium, the additional rate of return investors require for long-term loans, is also increasing, and one factor is the sheer level of uncertainty about the future path of inflation and the productive potential of the economy.”

As the UK continues to have higher inflation than most other developed countries, the Bank of England has taken a more hawkish course than most other developed countries.

However, a key factor is the scale of bond sales by the UK government and the Bank of England.

Government bond issuance is expected to reach about $300 billion this year, boosting yields even as the economy begins to show cracks.

Stagnant growth and the ongoing gilt sell-off have “almost eliminated Prime Minister Reeve's fiscal space, which was already incredibly small at around $10 billion,” Brown said.

Read more UK long-term borrowing costs hit their highest level since 1998. Similar tagged content: Sections Categories People & Organizations Related Topics

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