UK Market Selloff Deepens With Pound Falling to Lowest in Year

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UK Market Selloff Deepens With Pound Falling to Lowest in Year

general :: 2025-01-09 :: source - bloomberg

By Alice Atkins and Vassilis Karamanis

UK Market Selloff Deepens With Pound Falling to Lowest in Year · Bloomberg

(Bloomberg) -- The pound dropped to a more than one-year low, stocks fell and gilts extended a fourth day of losses on concern the Labour government will struggle to keep the deficit in check as borrowing costs surge.

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Sterling retreated for a third day, sliding as much as 1% to $1.2239, the lowest since November 2023. Gilts declined sharply at the open, with the 10-year yield rising as much as 13 basis points to 4.92%. The FTSE 250 Index tumbled as much as 1.1%, the worst showing since August.

The nation’s assets are at the forefront of a global rout fueled this week by Donald Trump’s latest threats to impose tariffs and worries that inflation will remain elevated for longer than expected. The speed of the moves has seen comparisons drawn to the fallout from Liz Truss’ ill-fated mini-budget in 2022.

While market structure has been strengthened to prevent a crisis of that scale, the government’s escalating debt burden is once again a source of concern for investors. A former Bank of England policymaker has even draw parallels to the 1976 debt crisis, which saw the UK government ask the IMF for a bailout.

“When you see both yields and currencies higher, more often than not it tends to be a signal of capital flight,” said Eva Sun-Wai, a fund manager at M&G Investments, on Bloomberg Radio. “The worry is that investors have just lost faith in the UK as a place to put their assets.”

If the surge in long-term bond yields is sustained, it could pressure the UK government to tighten fiscal policy. Chancellor of the Exchequer Rachel Reeves will favor fresh cuts to public spending over tax hikes if the rise in borrowing costs wipe out her dwindling £9.9 billion ($12.2 billion) of fiscal headroom, according to people familiar with her plans.

The moves have caught some market participants off guard. Typically, higher interest rates boost the appeal of a currency, so the drop this time can be indicative of UK assets losing their attractiveness as investors fret about persistent inflationary pressures and fiscal sustainability.

“The pound could remain the preferred pressure valve for anxious investors who worry about the outlook of their UK portfolios,” said Valentin Marinov, head of Credit Agricole’s Group-of-10 FX strategy in London. “Markets are quite skittish at the moment. FX traders will continue to ‘milk’ the heightened FX volatility for whatever it’s worth.”

What Bloomberg Strategists Say:

“In a classic sign of market jitters, the pound’s volatility term structure, which had a normal slope as recently as the new year, has inverted — suggesting that traders fear more downside in the short term.”

— Ven Ram, Cross-Assets Strategist, Dubai

The options market shows pound turmoil may persist as hedging swings over the next week versus the dollar and the euro costs the most since the US November elections. Traders are most bearish on the UK currency in two years, according to risk reversals, a barometer of market positioning and sentiment.

--With assistance from Masaki Kondo, Ruth Carson and Greg Ritchie.

(Updates throughout.)