Sterling fell sharply yesterday as investors panicked following a rout in the gilt market.
Gilts are bonds issued by the UK government to raise funds through borrowing. Yesterday, the yield required on 30-year gilts jumped to the highest level since 1997 (5.7%+) and the 10-year gilts traded to the highest levels of 2025 (4.8%).
While rising global yields are part of the broader trend, it's the rapid pace of change in UK yields that has spooked investors, which has led to Pound weakness. The key driver appears to be mounting concerns over the UK’s public finances, given the massive shortfall between government spending and income, which will likely force further tax hikes in autumn. The issue is that the further gilt yields continue to climb, the larger the government borrowing costs would become and therefore the greater the tax hikes would need to be to plug the gap. This type of dangerous cycle risks destabilising the UK economy if it takes grip. All eyes will be on Chancellor Reeves’ next steps and how the market continues to react.
Over the pond, higher Treasury yields have been supportive for the USD so far this week because (unlike in the UK) the moves have been orderly. Additionally, weakness in the Pound and Japanese Yen have increased flows into the USD. Despite news over the weekend that most of Trump’s tariffs have been ruled illegal, the USD remains strong, as investors see little chance that they will be revoked. The main focus this week will be on Friday’s nonfarm payrolls figures, particularly after the disappointing figures last month. Aside from the headline reading, the key thing to look out for will be whether we see any further downward revisions to previous data, as we’ve in each of the last six months.
As a result, the GBP/USD fell close to 2-cents yesterday and hit a 4-week low this morning. The GBP/EUR dropped just under 1-cent yesterday and traded close to a 4-week low.
