LONDON – The pound steadied on Friday after a turbulent week that underscored investor anxiety over the UK’s fiscal outlook, with volatility in the bond market highlighting deep unease about the government’s ability to rein in borrowing.
Sterling was last quoted at US$1.3455, on track for its third consecutive weekly decline. Against the euro, the pound was broadly flat at 86.67 pence.
The rout in long-dated gilts pushed 30-year yields to their highest level since 1998 earlier this week, part of a global sell-off in sovereign debt. Typically, rising yields lend support to the currency. But in this case, the move reflects inflation fears rather than confidence in the UK’s growth trajectory – leaving sterling vulnerable.
Bank of England governor Andrew Bailey, addressing lawmakers on Thursday, said further rate cuts remain likely but warned that the pace is far from certain. “There is now considerably more doubt about exactly when and how quickly we can make those further steps,” he told Parliament’s Treasury Committee, reiterating caution after the August policy move.
Derivatives pricing shows traders almost fully expect a rate cut at the BoE’s September 18 meeting, but the odds for subsequent easing have fallen sharply. The probability of a November cut has slid to 18%, from 67% just a month ago.
Kathleen Brooks, research director at XTB, said UK yields could retreat from recent highs but are likely to remain elevated relative to peers for some time. “With uncertainty building ahead of the November budget, we believe sterling peaked in July at US$1.38 and will likely trade sideways below US$1.35 in the near term,” she added.
Chancellor Rachel Reeves is due to present her autumn budget on November 26. She faces pressure to restore confidence in the UK’s fiscal discipline, promising tighter spending controls to curb inflation and reduce borrowing costs.
Still, Britain’s debt market remains under strain. The UK carries the highest borrowing costs among the G7, with 10-year gilts yielding 4.74%, compared with 4.2% for US Treasuries and just 1.6% for Japan’s low-yielding government bonds.
