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Pound Recovers After Hitting 14-Year-Low While Markets Watch £1B UK Government Debt Auction

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Giuseppe Ciccomascolo
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Key Takeaways

  • The British pound fell to its weakest point in over a year amid growing concerns over the U.K. bond market.
  • The rise in borrowing costs has triggered concerns about Chancellor Rachel Reeves’s ability to meet her fiscal rules.
  • Analysts warn that the U.K.’s fragile fiscal position could lead to severe austerity measures.

The pound has plummeted  to its lowest level in 14 months, as heightened concerns over U.K. assets continue to rattle the financial markets.

Analysts attribute the pound’s struggles  to a global bond market sell-off, which has shaken confidence in the U.K.’s financial stability.

With the pressure mounting on Chancellor Rachel Reeves, questions about the government’s fiscal strategy are intensifying.

Sterling Up, but Public Borrowing Pushes Higher

The pound recovered after hitting 14-month lows, last week, as U.K. government bonds regained some of the ground lost following a significant sell-off.

Sterling held steady at 1.23 against the U.S. dollar  in early trading, after it recently dropped to its lowest level since November 2023.

Kathleen Brooks, research director at XTB, said , “There was more bad news for the U.K.’s public finances. Borrowing rose sharply in December to $17.8 billion from $11.8 billion in November,” adding:

“The bond market will tell us if it tolerates this level of borrowing from the U.K. government when it opens later this morning. After last week sell off in U.K. bonds, these figures could reignite fears about the sustainability of the U.K. public sector spending habits. The increase in public sector net cash requirement last month is also likely to upset the bond market, although it was expected.”

The weak growth figures and higher borrowing costs are a toxic mix for bond markets right now, according to Brooks.

“The pound has dropped sharply on this data, and GBP/USD is down 30 points, at $1.2320. Since the pound and U.K. bond yields have an inverse correlation, this may suggest that bond yields will rise later today,” she said.

“Overall, the bond market is already wary about U.K. government spending, and today’s figures show they are right to be. These figures once again heap pressure on Rachel Reeves to cut public spending rapidly, possibly in March,” Brooks concluded.

Market Awaits Further Bond Sale

The Treasury is set to sell an additional £1 billion  in government debt today, posing a significant challenge for Rachel Reeves amid recent financial market turmoil.

The U.K.’s Debt Management Office will conduct an auction for 30-year inflation-linked Gilts following a surge in long-term government borrowing costs to a new 27-year high.

The pound’s weakness raised concerns about the Chancellor’s ability to adhere to fiscal rules. Reeves has seen her £10 billion budget buffer eroded by rising bond yields, with the 10-year Gilt coupon reaching its highest level in 16 years.

For six consecutive days, yields on both 10-year and 30-year gilts have risen, partly due to concerns about inflationary policies under Donald Trump’s potential return to office.

For Brooks, the market has already sent her a warning sign earlier this month, so any bond market sell-off could be mild.

“However, we expect some of the recent recovery in the bond market to be unwound on the back of this data,” she opined, “She may also need to communicate more forcefully her commitment to cutting spending, even the sacred cows, to get the bond market back on side, and the numbers down, in the long run.”

Reeves’ Policy Weighs on Sterling

The increase in borrowing costs may force Chancellor Rachel Reeves to reduce spending or raise taxes to stay within her fiscal targets.

Last night, Reeves reassured the public , stating that she had an “iron grip” on the nation’s finances, with a Treasury spokesperson adding:

“No one should be under any illusion—meeting the fiscal rules is non-negotiable, and the Government will maintain strict control over public finances.”

However, Reeves is now facing a forex market issue and a bond market challenge. Following a rise in the government’s borrowing costs, with the 10-year debt rate reaching its highest level since 2008, the Chancellor risks breaching her fiscal rules.

For the last 15 years, Western governments have benefited from cheap borrowing due to low interest rates, a legacy of the 2008 financial crisis.

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Giuseppe Ciccomascolo

Giuseppe Ciccomascolo began his career as an investigative journalist in Italy, where he contributed to both local and national newspapers, focusing on various financial sectors. Upon relocating to London, he worked as an analyst for Fitch's CapitalStructure and later as a Senior Reporter for Alliance News. In 2017, Giuseppe transitioned to covering cryptocurrency-related news, producing documentaries and articles on Bitcoin and other emerging digital currencies. He also played a pivotal role in establishing the academy for a cryptocurrency exchange website. Crypto remained his primary area of interest throughout his tenure as a writer for ThirdFloor.
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