GBP flows: GBP starting soft
GBP under pressure on worries over weak growth and fiscal position, although rising bund yields have also contributed
GBP is falling back in early European trading, with the market still focused on rising yields in the UK gilt market and the concerns that these will further undermine the UK’s fiscal stability. Rising bund yields overnight, as the bund market also continues to show some concern about stubbornly high German inflation, also suggest we may see further rises in UK yields this morning. This may sustain the narrative that the current situation is similar to the post-Truss Budget loss of confidence in UK assets seen in 2022, albeit currently on a smaller scale.
There is an element of truth in this, but it is also the case that before yesterday’s spike higher in gilt yields, yield spreads had been moving against GBP due to higher bund yields in the early part of the year, so the decline in GBP may also be something of a delayed reaction to this move. There is a speech from BoE deputy governor Sarah Breeden on the outlook for inflation and monetary policy at the University of Edinburgh business school at 16:00 GMT, and the markets need something on the dovish side if they are to halt the current negative spiral. While higher long term yields are a function of confidence in the fiscal position, and may be hard to reverse, the rise in shorter term yields is unlikely to persist if the market sees a more dovish BoE stance. This would still not be good for GBP, but a declining pound on lower yields would look a lot healthier than a declining pound on higher yields. Most roads seem to lead to a weaker pound here, in the absence of some stronger UK data, so EUR/GBP has scope to 0.84 and above. Even so, we would still point out that this is still a strong level for GBP from a long term perspective.
