Pound Falls to Lowest Since June as 30-Year Gilt Yield Tops 6%

Sterling is under pressure from two directions at once. GBP/USD slipped below 1.3200 this week, its lowest level since late June, and trades just above 1.3210 on Friday morning. The pound has fallen about 3% against the dollar over the past month.

A stronger US dollar explains part of the move. The rest comes from home: UK government borrowing costs have surged to levels not seen in decades, and a Bank of England (BoE) policymaker has signalled little appetite for further rate rises.

Gilt yields hit a 28-year high

On Thursday 1 October the yield on the 30-year gilt climbed as high as 6.029%, crossing 6% for the first time since 1998. The 10-year gilt reached 5.51%, its highest since July 2007. London's FTSE 100 fell 177.73 points to 10,428.27, its worst session since May, led by banks, housebuilders and domestic stocks.

Part of the rise reflects the global bond sell-off that has also lifted US Treasury yields to two-decade highs. Some of it is specific to Britain. Investors are uneasy about the government's finances ahead of the Autumn Budget on 28 October, and they are demanding more to lend over long periods.

For currency traders, rising yields usually help a currency. This is the exception: when yields climb because investors worry about public finances, money tends to leave rather than arrive, and the currency weakens alongside the bonds.

A BoE member pushes back on more hikes

External Monetary Policy Committee member Alan Taylor said on Tuesday that energy prices alone do not justify higher rates and described current policy as "restrictive enough". He argued that the case for further increases is not compelling unless energy prices stay high for a long period and spread into broader inflation.

His remarks pushed GBP/USD to its low of the week. Markets now expect the BoE to lag the Fed in tightening, which removes one of the pound's main supports. Bank Rate stands at 3.75%; the next decisions are due on 5 November and 17 December.

Energy bills and inflation

Two changes to household energy costs took effect on 1 October and pull in opposite directions. The 5% VAT on household electricity dropped to zero, which is expected to trim about 0.1 percentage point from CPI inflation. At the same time Ofgem's price cap rose 4%, adding roughly £60 to typical annual bills, with gas up 8% and electricity flat.

Britain's final second-quarter GDP estimate confirmed growth of 0.4% on the quarter and 1.2% on the year. That is respectable, but not strong enough to offset fiscal concerns in the market's eyes.

GBP/USD levels to watch

A daily close below 1.3150 would take the pair to fresh lows for the year and confirm the downtrend. On the upside, sterling needs to reclaim 1.3250 before buyers can talk about a recovery. Friday's US jobs report is the next trigger; a soft figure would give the pound room to bounce. Our daily GBP/USD analysis lists today's trade plans.

Why markets remember 2022

Gilt traders have seen a bond panic before. In September 2022 an unfunded mini-budget sent long-dated gilt yields soaring, forced pension funds to sell assets and pushed GBP/USD to a record low. The Bank of England stepped in with emergency bond purchases to calm the market.

Today's moves are slower and the government's plans are not yet known, so the comparison has limits. Still, that episode taught investors to sell the pound quickly when fiscal credibility is in doubt. Any hint in the 28 October Budget of higher borrowing without a clear plan to pay for it could trigger a similar reflex, even if on a smaller scale.

The reverse is also possible. A Budget that reassures bond investors could pull gilt yields lower and let sterling recover some of September's losses, especially if US data cools at the same time.

What to watch before the Budget

The 28 October Budget lands on the same day as the Fed's rate decision and one day before the ECB's. That stack of events could make late October the most volatile stretch of the year for sterling.

• Fiscal rules: any sign of looser borrowing targets could push gilt yields and the pound in opposite directions again.
• Gilt auctions: weak demand at long-dated sales would add to pressure on the currency.
• BoE speakers: hawkish comments could steady sterling; more voices like Taylor's would weigh on it.
• EUR/GBP: the pound still holds a rate advantage over the euro, which has kept EUR/GBP steadier than GBP/USD.

Sterling against the other majors

Things look different away from the dollar. Against the euro, sterling still benefits from higher UK interest rates, and EUR/GBP has moved far less than GBP/USD this month. Versus the yen, the pound remains strong because Japanese rates are so low, although GBP/JPY can fall sharply on days when risk appetite turns sour.

For many traders that means the cleanest way to express a view on UK fiscal risk is GBP/USD, where both a stronger dollar and weaker gilts point the same way. Crosses add other forces, such as ECB and BoJ policy, that can blur the signal.

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Sources: FXStreet: pound and BoE's Taylor · Global Banking & Finance: 30-year gilt · BBN Times: FTSE 100 · Bank of England