Crisis or Storm in a Teacup, Pound Consolidates vs Euro and Dollar

January 10, 2025 - Written by Tim Boyer

STORY LINK Crisis or Storm in a Teacup, Pound Consolidates vs Euro and Dollar

The Pound to Dollar (GBP/USD) and Pound to Euro (GBP/EUR) exchange rates traded around 1.23118 and 1.19443 respectively on Friday.

The UK will not be impacted in isolation as sustained increase in global bond yields will have a negative impact on all major economies.

Jim Reid, market strategist at Deutsche Bank, commented; “even though the UK might appear the most striking in terms of when yields last traded at these levels, other countries have experienced a similar pattern too.”

A key question is whether the UK is more vulnerable than other major economies including the Euro area.

The consensus view late in 2024 was that the UK economy would out-perform the Euro-Zone during 2025 and that this would provide a strong backdrop for the Pound.

The October UK budget sanctioned a big jump in spending while there were notable business tax increases.

The government hoped that stronger spending would help jump-start the economy, but higher yields will trigger fears that the government strategy is unravelling and potentially force renewed fiscal restraint.

Danske Bank noted; “The Labour government's expansionary budget from the end of October has come under pressure with funding costs soaring together with weaker than expected growth since the announcement of the budget.”

It added; “As we have previously argued, we think the government is set to either roll back some of its measures or hike tax further at the next fiscal event in March. We remain cautiously optimistic that the move in UK space is overdone, but stress that if risk appetite continues to sour the moves could continue.”

The jump in yields has been a global phenomenon which should lessen the risk of the Pound being singled out for attention.

There will also be some relief that UK mortgage rates have not yet increased, but a sustained increase in yields would be potentially very damaging and growth will inevitably be weaker.

The Pound will also be vulnerable if global risk appetite deteriorates.

Swissquote Bank senior analyst Ipek considers that Pound confidence is still vulnerable and commented; “I have the feeling that investors somehow continue to blame the UK for its decision to quit the EU.”

According to Ozkardeskaya; “The UK – which has a huge debt, dismal productivity and growth and a thick layer of unnecessary regulation like continental Europe – still has a debt-to-GDP level lower than other developed economies like France, Italy, Spain and Japan! But the country faces relatively tougher market reaction to its political decisions.”

He added; “the cost of boosting growth has become significantly more expensive for the UK government, meaning that we may not see the UK perform as well as it did last year. And that sets the pound outlook negative at the early weeks of the new year.”

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TAGS: Pound Sterling Forecasts