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The pound fell to its lowest level since November 2023 on Thursday, as Britain’s currency was rocked by a bond market selloff that threatens to derail the Labor government’s fiscal plans.
In early London trading, the pound was down 0.8 percent at $1.2269 as investors braced for another volatile day in the gold market.
The currency has been hit by tensions in the bond market as investors worry about the government’s large borrowing needs and the growing threat of stagflation, which combines weak growth and persistent price pressures.
“The economy is entering stagflation,” said Mark Dowding, chief investment officer at RBC Bluebay Asset Management.
Sterling was also hit by the recovery in the dollar, which strengthened as a raft of recent US data boosted investor confidence in the world’s largest economy.
The dollar index, which measures the dollar against a basket of six other currencies, rose 0.1 percent on Thursday.
Chancellor Rachel Reeves left herself a slim £9.9bn of headroom against her revised fiscal rules in the Budget, even as she announced a £40bn package of tax rises aimed at “wiping everything out” of the public finances.
Rising yields on government debt have since threatened that budgetary wiggle room. The level of bond yields is an important determinant of budget space given its implications for government interest rates, which exceed £100 billion a year
On Wednesday, the cost of UK 10-year borrowing rose to its highest level since the global financial crisis. Analysts say the simultaneous sell-off in gilts and the pound on Wednesday was similar to the reaction triggered by Liz Truss’s “mini” Budget 2022.
