Market Data 
- The Pound Sterling faces severe selling pressure as a sharp spike in UK gilt yields mirrors a weak economic outlook.
- Fears of persistent UK inflation and Trump’s tariff hike plans have pushed UK bond yields to their highest levels since 1998.
- Renewed US inflation fears have forced Fed officials to turn cautious on interest rate cuts.
The Pound Sterling (GBP) weakens against its major peers on Thursday due to a significant jump in the United Kingdom (UK) government’s borrowing costs. An intense sell-off in UK bonds has pushed 30-year gilt yields to 5.36%, the highest level since 1998. Typically, higher UK gilt yields boost the appeal of the British currency. However, the correlation is not legitimate at this point as a resurgence in inflationary pressures and potentially inflationary United States (US) President-elect Donald Trump policies have weighed on the UK’s economic outlook.
This has led to doubts over whether Chancellor of the Exchequer Rachel Reeves will fulfill its fiscal rules, including a non-negotiable commitment to avoid borrowing for day-to-day spending. However, a British finance ministry spokesperson responded that “No one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances,” Reuters reported.
A sudden spike in UK bond yields has raised concerns about whether the country will remain committed to funding public services and growth-boosting investments through bond selling without further raising taxes.
Meanwhile, the Bank of England (BoE) doesn’t appear to cut interest rates at a faster pace ahead as high inflation due to stubborn wage growth remains a limiting factor. Traders price in roughly 60 basis points (bps) interest rate reduction by the BoE this year, suggesting that there will be more than two rate cuts. However, analysts at Goldman Sachs said in a note this week that the BoE will cut interest rates in each quarter through the year. This suggests that the BoE policy rate could decline to 3.75% by the year-end.
In Thursday’s European session, the BoE survey reported that expectations for inflation a year ahead rose from 2.7% to 2.8% in the three months to December.
British Pound PRICE Today
The table below shows the percentage change of the British Pound (GBP) against listed major currencies today. The British Pound was the strongest against the Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.02% | 0.56% | -0.21% | -0.01% | 0.33% | 0.26% | -0.04% | |
| EUR | -0.02% | 0.54% | -0.21% | -0.04% | 0.31% | 0.24% | -0.06% | |
| GBP | -0.56% | -0.54% | -0.76% | -0.57% | -0.23% | -0.29% | -0.58% | |
| JPY | 0.21% | 0.21% | 0.76% | 0.17% | 0.53% | 0.42% | 0.18% | |
| CAD | 0.01% | 0.04% | 0.57% | -0.17% | 0.35% | 0.28% | -0.00% | |
| AUD | -0.33% | -0.31% | 0.23% | -0.53% | -0.35% | -0.07% | -0.35% | |
| NZD | -0.26% | -0.24% | 0.29% | -0.42% | -0.28% | 0.07% | -0.28% | |
| CHF | 0.04% | 0.06% | 0.58% | -0.18% | 0.00% | 0.35% | 0.28% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
Daily digest market movers: Pound Sterling underperforms USD, focus is on US NFP
- The Pound Sterling declines below 1.2300 against the US Dollar (USD) in Thursday’s London session, the lowest level seen in over a year. The GBP/USD pair weakens as the USD performs strongly on the back of firm US bond yields as President-elect Donald Trump is expected to declare a national economic emergency to provide legal justification for a likely increment in import tariffs on the nation’s allies and adversaries, CNN reported.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges higher to near 109.25 but remains inside Wednesday’s trading range at the time of writing. The 10-year US Treasury yields trade close to 4.67%, the highest level since April 2024.
- Market participants expect that the US’s higher tariffs will boost demand for domestically produced goods and services, raising growth prospects, employment, and inflationary pressures. This scenario will force Federal Reserve (Fed) policymakers to remain cautious on interest rates for longer, which will be USD-positive.
- Recent Fed minutes from the December meeting also hinted that the disinflation process has stalled temporarily, forcing policymakers to signal fewer interest rate cuts for this year.
- Meanwhile, a sharp rise in the US ISM Services Prices Paid component of the Purchasing Managers Index (PMI) report for December shows that upside risks to inflation have renewed again. The data came in at 64.4, sharply higher from the prior reading of 58.2.
- Going forward, investors will pay close attention to the US Nonfarm Payrolls (NFP) data for December, which will be published on Friday.
Technical Analysis: Pound Sterling tumbles to near 1.2250
The Pound Sterling slumps to a more-than-a-year-low near 1.2250 against the US Dollar (USD) on Thursday. The GBP/USD pair faces a sharp sell-off after breaking below the January 2 low of 1.2350. The broader outlook of the Cable remains bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) near 1.2510 and 1.2645, respectively, are declining.
The 14-day Relative Strength Index (RSI) drops sharply to near 30.00, suggesting a strong bearish momentum.
Looking down, the pair is expected to find support near the November 10, 2023, low of 1.2185. On the upside, the 20-day EMA will act as key resistance.
UK gilt yields FAQs
UK Gilt Yields measure the annual return an investor can expect from holding UK government bonds, or Gilts. Like other bonds, Gilts pay interest to holders at regular intervals, the ‘coupon’, followed by the full value of the bond at maturity. The coupon is fixed but the Yield varies as it takes into account changes in the bond’s price. For example, a Gilt worth 100 Pounds Sterling might have a coupon of 5.0%. If the Gilt’s price were to fall to 98 Pounds, the coupon would still be 5.0%, but the Gilt Yield would rise to 5.102% to reflect the decline in price.
Many factors influence Gilt yields, but the main ones are interest rates, the strength of the British economy, the liquidity of the bond market and the value of the Pound Sterling. Rising inflation will generally weaken Gilt prices and lead to higher Gilt yields because Gilts are long-term investments susceptible to inflation, which erodes their value. Higher interest rates impact existing Gilt yields because newly-issued Gilts will carry a higher, more attractive coupon. Liquidity can be a risk when there is a lack of buyers or sellers due to panic or preference for riskier assets.
Probably the most important factor influencing the level of Gilt yields is interest rates. These are set by the Bank of England (BoE) to ensure price stability. Higher interest rates will raise yields and lower the price of Gilts because new Gilts issued will bear a higher, more attractive coupon, reducing demand for older Gilts, which will see a corresponding decline in price.
Inflation is a key factor affecting Gilt yields as it impacts the value of the principal received by the holder at the end of the term, as well as the relative value of the repayments. Higher inflation deteriorates the value of Gilts over time, reflected in a higher yield (lower price). The opposite is true of lower inflation. In rare cases of deflation, a Gilt may rise in price – represented by a negative yield.
Foreign holders of Gilts are exposed to exchange-rate risk since Gilts are denominated in Pound Sterling. If the currency strengthens investors will realize a higher return and vice versa if it weakens. In addition, Gilt yields are highly correlated to the Pound Sterling. This is because yields are a reflection of interest rates and interest rate expectations, a key driver of Pound Sterling. Higher interest rates, raise the coupon on newly-issued Gilts, attracting more global investors. Since they are priced in Pounds, this increases demand for Pound Sterling.
