Pound Sterling Slumps vs euro and Dollar on Truss 2.0 Sell-off

January 9, 2025 - Written by David Woodsmith

STORY LINK Pound Sterling Slumps vs euro and Dollar on Truss 2.0 Sell-off

The Pound to Euro (GBP/EUR) and Pound to Dollar (GBP/USD) exchange rates posted sharp losses on Wednesday and there was further selling pressure in Asia on Thursday.

The Pound to Dollar rate dipped sharply to 13-month lows at 1.2240 before a recovery to near 1.2300.

MUFG commented; “Overall, the unfavourable market developments have increased downside risks for the pound at the start of this year and increase the likelihood of cable falling back below 1.2000.”

ING sees vulnerability and added; “GBP/USD downside does look vulnerable to positioning and the incoming Trump agenda. 1.2250 is very possible.”

It did, however, add; “1.20 looks a bit of a stretch.”

The Pound to Euro (GBP/EUR) exchange rate also dipped sharply to 2-month lows at 1.1900 before a recovery to 1.1925.

ING expects GBP/EUR will find support on any further sharp dips to 1.1765.

The UK bond market has come under further selling pressure over the past 24 hours. The 10-year yield increased to near 4.90%, the highest level since October 2008 while the 30-year yield increased to the highest level since August 1998 at above 5.40%.

Markets remain very sensitive to any sell-off in the gilt market, especially after the 2022 Truss fiscal event.

ING commented; “Our best understanding of yesterday's sterling sell-off is that the global bond market sell-off touched a raw nerve in the gilt market and that then the gilt spread widening prompted investors to cut back on overweight sterling positioning.”

The Pound has tended to draw support from hopes that the UK economy would be relatively insulated from the threat of increased tariffs by the incoming Trump Administration.

The Sterling sell-off has tended to puncture these hopes.

ING added; “In a way, today’s sterling sell-off can be seen as a mini-capitulation of the overriding theme of a Trump-inspired strong dollar in 2025.”

Higher yields can offer support to currencies, but this is not always the case, especially if there is a slide in confidence and stagflation fears.

MUFG commented; “Recent price action highlights though that higher yields are not always positive for a currency if they are driven by unease over the public finances and inflation in the UK.”

Higher bond yields will also put significant upward pressure on debt-interest payments while higher mortgage rates will dampen activity in the economy which hurts tax revenue.

In this context, there is the risk that the government will have to tighten fiscal policy which would further undermine growth conditions and have potential implications for monetary policy.

MUFG noted that Treasury sources have reportedly acknowledged that the government could be forced to act as soon as March in response to higher borrowing costs.

Kyle Chapman, FX markets analyst at Ballinger Group was more sanguine over the outlook; "The moves are related to an ongoing concern about UK borrowing levels but I don't see enough of a reason for such a rapid market move."

He added; "I think that we are going to see some recovery quite quickly once the market calms."

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TAGS: Pound Sterling Forecasts