The British pound has plummeted to its lowest level against the US dollar in over a year, reflecting heightened investor anxiety about the UK’s fiscal and inflation outlook. As reported by Bloomberg, sterling dropped by as much as 0.7% to $1.2280, the lowest since November 2023.
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This sharp depreciation of the pound comes as the yield on the UK’s 30-year bond surged to its highest level since 1998, and yields on 10-year bonds reached heights last seen in 2008. According to Valentin Marinov, head of Credit Agricole’s Group-of-10 FX strategy in London, “FX traders will continue to milk the heightened FX volatility for whatever it’s worth,” indicating ongoing uncertainty in the market.
Typically, rising interest rates tend to increase the attractiveness of a currency. However, the pound’s decline suggests a potential capital flight as investors grow increasingly uneasy about the UK’s persistent inflationary and fiscal pressures. These moves in the market have been likened to a “micro” repeat of the 2022 UK financial turmoil, which saw sterling fall to record lows and government borrowing costs soar, putting pension funds at risk.
Despite improvements in market structures to avoid another crisis on the scale of 2022, there is apprehension that the selloff may intensify if there are no adjustments to the government’s fiscal policies. Chancellor of the Exchequer Rachel Reeves faces mounting pressure as rising borrowing costs erode her £9.9 billion ($12.2 billion) fiscal buffer. Industry data from the IndexBox platform indicates ongoing volatility in the foreign exchange markets, underscoring the precarious state of investor confidence in UK’s economic policies.
