Why is the GBP selling off?
The British pound has sharply declined to its lowest level since November 2023, influenced by economic uncertainty and fiscal instability, while the strong US dollar continues its upward trajectory.
Key points
- GBP/USD falls to 1.2191, a low not seen since November 2023
- UK bond yields rise, but inflation fears weigh on the pound
- Chancellor Reeves faces fiscal challenges amid borrowing increases
- US dollar strengthens with positive economic data and rising yields
- Traders watch UK fiscal policies and US trade strategies for impacts
Pound falls to lows not seen since November 2023
The British pound sterling has experienced frequent selloff this week, plummeting from above 1.2570 all the way to 1.2191. These levels have not been seen since November 2023, and shows a rapid decline for the cable. Several factors may be contributing to this volatility, including uncertainty surrounding the UK's economic outlook and its trade relations, especially amid shifting policies and potential disruptions in global markets. Additionally, investor sentiment might be affected by domestic political developments or central bank signals regarding interest rates and inflation.
GBP/USD price history
Inflation and fiscal concerns mount in the UK economy
Despite UK bond yields surging, the British pound has still found a decline. The 30-year yield has hit 5.47%, its highest level since 1998, and the 10-year yield reached 4.8%, levels unseen since 2008. While higher yields typically support a currency, the current decline indicates a bearish nature of the pound due to fears of ongoing inflation and overall financial instability.
With borrowing costs rising, Chancellor Rachel Reeves’ fiscal flexibility has fallen. This past October, Reeves introduced a £142 billion borrowing budget and a £74 billion budget increase in annual spending, leading to worries about fiscal stability. Inflation expectations also have increased. As a result, analysts are forecasting only two Bank of England rate cuts this year.
Strong US economic outlook for 2025 amid employment data
As bullish bets started favoring other currencies, the dollar has regained its strength. This resurgence is driven by strong economic conditions, limited interest rate cut forecasts of 36 basis points for 2025, and Trump's assertive domestic and global economic policies.
Additionally, CNN reports that President-elect Donald Trump is considering declaring a national economic emergency to justify universal tariffs. Consequently, bond markets have pushed 10-year Treasury yields up by over 8 basis points to 4.728%. US jobs data has come in strong, with Nonfarm Payrolls data at 256K jobs added this December, its highest level in 9 months. Additionally, Unemployment has decreased 0.1% to 4.1%, below market expectations of last month’s rate of 4.2%.
What’s next for GBP/USD?
Despite a surge in UK bond yields, which usually supports a currency, fears of ongoing inflation and fiscal instability have resulted in a bearish sentiment for the pound. Rising borrowing costs and fiscal pressures on Chancellor Rachel Reeves further cloud the economic landscape.
Looking forward, the GBP/USD pair may continue to experience volatility. The strong US dollar and its economic outlook and rising Treasury yields could maintain the dollar's upward trajectory, while ongoing UK economic and fiscal concerns might further weaken the pound. Traders should closely monitor developments in UK government and fiscal policy, inflation indicators, and any shifts in US trade policies for their potential impact on GBP/USD movements.
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- Open an account to get started, or practice on a demo account
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Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
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