Pound under pressure but off lows

UK bond yields rose sharply and sterling weakened considerably yesterday amid concerns about the public finances and the position of the Chancellor, Rachel Reeves, following the government’s climbdown on cuts to disability benefit spending, before a statement from Number 10 insisting the Chancellor was “going nowhere” helped to steady markets to some extent. The pound is trading at around $1.3670 against the dollar this morning, down about a cent from yesterday morning’s levels but more than a cent off its intra-day low of almost $1.3550, and at £0.8640 against the euro, down around three quarters of a penny from yesterday morning but off yesterday’s low of about £0.8670. Meanwhile, the euro is a touch firmer against the dollar, trading just north of $1.18, ahead of the key jobs report in the US this afternoon.

UK long-dated bond yields, in particular, surged yesterday with 10- and 30-yields increasing by around 15bps and 20bps respectively. There was some spillover to other bond markets, with equivalent German yields increasing by 7-8bps and US yields up a more modest 3-4bps. In equity markets, UK stocks ended marginally lower on the day, though they underperformed their European and US peers, which chalked up gains of 0.5% to 1% (the S&P 500 setting a new high in the process).

While the focus was on fiscal policy yesterday, UK monetary policymaker, Alan Taylor, one of the most dovish members of the Bank of England’s MPC, argued for three more quarter-point cuts in interest rates this year (and for further easing in 2026), given weak economic growth and increasing slack in the labour market as the unemployment rate rises.  The market is currently pricing in about 55bps of cuts by end-2025, with a 25bps reduction more or less fully expected at next month’s MPC meeting.

Yesterday’s ADP report in the US was much weaker than expected with private employment falling by 33k last month, versus the consensus forecast for an increase of about 100k. This left the average monthly increase in employment in Q2 at just 19k, down from 139k a month in Q1 and a peak of 200k in the final quarter of last year.

Regarding today’s official US jobs report, it is expected to show payrolls rose by 106k in June, following an increase of 139k in May, with the unemployment rate ticking up to 4.3% (from 4.2%) and average hourly earnings growth easing to 3.8% y-o-y (from 3.9%). Other US data today include weekly jobless claims and the ISM services index, while final readings for the June services PMIs are due in the main economies. The ECB publishes the minutes of last month’s monetary policy meeting.