Recently, there has been significant activity in the British bond market and the valuation of the British pound. The 10-year UK government bonds have reached their highest levels since 2008, while the 30-year bonds have risen to a peak not seen since 1998. At the same time, the pound has come under pressure, losing 1% against the US dollar. Today, it continues to decline, with the GBPUSD currency pair falling to 1.2250, the lowest level since the fall of 2023.
Yesterday, there was no specific reason to trigger such a movement. There were no macroeconomic data releases or official statements from the UK. This could be the culmination of a process that started several months ago, particularly related to political issues. Currently, the approval rating of the new Labour Party government is at a very low level (just after the elections). Additionally, both business and consumer sentiment are weak. The recent budget highlighted the very limited room for maneuver for the government. The situation in the debt market further restricts action options, increasing the risk of tax hikes or budget cuts.
The decline in the value of the pound does not entirely align with the Bank of England’s current stance on monetary policy. The BoE is still grappling with high inflation, which forces it to keep interest rates at elevated levels. The British economy is likely to feel the effects of Donald Trump’s planned new trade policy, though to a lesser extent than other European countries. The market currently anticipates that there is a possibility of a further rate cut at the February meeting, with the probability of such a move priced at nearly 68%. At the same time, expectations for the following months suggest that the BoE will hold off on further adjustments to rates, indicating a “hawkish” outlook for the remainder of the year.
At the moment, concerns about economic stability and fiscal policy in the UK dominate. These factors negatively affect investors’ perception of the pound. Additionally, the GBP is being somewhat weakened by the strong dollar, which continues to benefit from the results of the presidential elections.
In summary, the factors currently negatively impacting the British currency include weakening investor confidence in the government’s ability to manage public finances, political uncertainty (low government approval ratings), global factors (a strong dollar), as well as high inflation and rising debt servicing costs, which reduce the attractiveness of both UK bonds and the pound.
The GBPUSD chart this morning showed the lowest value since November 2023. The currency pair continues its medium-term downward trend, which began in early October. Today’s breach of support at 1.23 theoretically opens the way toward the autumn 2023 lows (1.2045). However, it is also possible that before this level is reached, the currency pair will make a local upward correction.
Author: Łukasz Zembik, Oanda TMS Brokers
