Sterling slumps to new low; gilt yields soar By Investing.com

British Pound US Dollar-0.08%Euro British Pound0.14%FLG0.29%

Investing.com - The Swap transactions explained in plain languageBritish pound slumped to its lowest level in over a year Thursday, weighing by falling confidence in the country’s fiscal outlook amid soaring borrowing costs.

At 08:10 ET (13:10 GMT), GBP/USD fell 0.7% to $1.2285, falling to its weakest level since November 2023. EUR/GBP jumped 0.5% to 0.8385, climbing to its highest level since September last year.

Sterling is headed for its biggest three-day drop in nearly two years, and follows British government bond yields hitting multi-year highs.

Higher bond yields would usually support the country’s currency, but there are fears that the rising costs needed to support UK government debt could lead to further tax increases or spending cuts, hindering the chances of an economic recovery.

The new Labour government has imposed a new rule upon itself not to borrow to fund day-to-day spending, but this is now under threat.

Treasury minister Darren Jones, speaking in the House of Commons earlier Thursday, said there was "no need for an emergency intervention" in financial markets.

Markets "continue to function in an orderly way" and movements in government borrowing costs were being driven by "a wide range of international and domestic factors," he added.

However, the very mention of government intervention has unnerved foreign exchange traders.

“The global bond market sell-off touched a raw nerve in the gilt market and that then the gilt spread widening prompted investors to cut back on overweight sterling positioning,” said analysts at ING, in a note.

“Perhaps most relevant for GBP here is the positioning data, where investors had felt that sterling could best withstand the overriding strong dollar trend.”