Open Editor's Digest for free
Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.
The pound fell to its lowest level since November 2023 on Thursday, as the British currency was hit by a bond market sell-off that threatens to derail the Labor government's fiscal plans.
In early trading in London, the pound fell 0.8 percent to $1.2269, as investors braced for another volatile day in the gold market.
The currency has been affected by pressures in the bond market as investors worry about large government borrowing needs and the growing threat of stagflation, which combines weak growth with persistent price pressures.
“The economy is entering a stagflation phase,” said Mark Dowding, chief investment officer at RBC Bluebay Asset Management.
The pound sterling was also affected by the rise in the dollar, which was strengthened as a result of a series of recent US data that strengthened investor confidence in the largest economy in the world.
The dollar index, which measures the currency against a basket of six others, rose 0.1 percent on Thursday.
Chancellor Rachel Reeves has left herself a slim margin of £9.9bn against her revised fiscal rules in the Budget, even after announcing a £40bn tax rise package aimed at “wiping the slate clean” from the public finances.
Since then, increases in government debt yields have put budget room for maneuver under threat. The level of bond yields is an important determinant of the size of the budget due to its effects on the government's interest bill, which exceeds £100 billion a year.
The UK's 10-year borrowing costs rose on Wednesday to their highest level since the global financial crisis. The simultaneous sell-off in bonds and sterling on Wednesday carried echoes of the reaction sparked by Liz Truss's “mini” Budget in 2022, analysts said.
