The pound takes a pounding

UK markets were the focus of attention yesterday, with bond yields rising sharply, stocks selling off, and sterling weakening notably. There was no clear and obvious catalyst for these moves, though fiscal/budgetary and inflation concerns have been cited. In any case, the pound’s slide is continuing this morning. It is trading at around $1.2280 at the start of play today, down almost 2 cents from Tuesday’s close, and has fallen close to £0.84 vis-a-vis the euro, down around a penny over the same period. The single currency is also under pressure against the dollar. It fell to an intra-day low of $1.0275 during yesterday’s session before recovering to over $1.03, but is trading back at $1.03 this morning.

The surge in UK yields was concentrated at the long end of the curve, with 10-year yields rising by 10bps to their highest level (4.79%) since 2008 and 30-year yields also up 10bps to their highest level (5.35%) since 1998. Elsewhere, German 10-year yields rose by around 5-6bps yesterday, while equivalent US yields were unchanged on the day. Meanwhile, in UK equity markets, the FTSE 250 shed the best part of 2%.

In a speech yesterday, Fed Governor Waller said he believes it will be appropriate to continue lowering interest rates this year, though “the pace of cuts will depend on how much progress we make on inflation, while keeping the labor market from weakening”. He noted that, in the Fed’s latest Summary of Economic Projections, the median policymakers’ expectation is for two quarter-point rate cuts this year, but “the range of views is quite large, from no cuts to as many as five cuts”.

For the day ahead, the focus will remain on developments in UK markets. In this regard, the Bank of England publishes data on inflation expectations, while elsewhere retail sales for November are due in the Euro area.