Investors have been advised to offload the British pound as analysts anticipate a deceleration in the UK economy following a bond market sell-off.
Deutsche Bank highlighted that sterling has experienced a “concerning” decline this week despite rising bond yields that typically support the currency. Analysts attribute the increase in bond yields to weakening economic indicators, including recent Purchasing Managers’ Index (PMI) data that revealed “another sharp drop in business employment expectations.” This downturn could prompt the Bank of England to consider lowering interest rates.
Strategist Shreyas Gopal stated, “We think there’s further to go in the recent pound weakness,” emphasizing the potential for continued depreciation. Sterling is on track to decrease by nearly 1% this week, driven by falling export orders. Gopal noted that weakening sterling could help attract more buyers for UK goods and services.
The decline in the pound coincides with a rise in government borrowing costs, posing challenges to Chancellor Rachel Reeves’ spending plans. Reeves is currently in China for a trade meeting, despite calls for her to remain in the UK to address the increasing borrowing expenses.
The yield on 10-year UK gilts has surged back towards its 2008 peak following stronger-than-expected US jobs data. The benchmark yield climbed to 4.88% after the US economy added 256,000 jobs last month, surpassing the anticipated 165,000. Consequently, the pound dropped by 0.7% to $1.222, its lowest level since November 2023. This decline reflects traders’ reduced expectations for the Federal Reserve’s next interest rate cut, influenced by robust US employment figures and potential inflationary measures from the incoming administration under Donald Trump.
Money markets have adjusted their forecasts, now pricing in the next Federal Reserve rate cut to occur by October, a shift from earlier expectations of a June cut. Slower rate reductions in the US are likely to influence the Bank of England to moderate its own interest rate adjustments to remain aligned with the world’s largest economy.
Richard Carter, from wealth manager Quilter Cheviot, commented, “In disappointing news for Chancellor Rachel Reeves, the bond market sell-off could continue following strong data out of the US today.” He further added, “Donald Trump’s imminent inauguration and his potentially inflationary agenda of tariffs, immigration controls, and personal and corporate tax cuts will likely cause the Fed to reconsider its approach in the upcoming meetings.”
