ExchangeRates.org.uk - Sterling has remained under pressure in global markets with the Pound to Dollar exchange rate (GBP/USD) sliding to 14-month lows near 1.2100.MUFG expects further near-term selling, with GBP/USD breaking below 1.20 and triggering losses to 1.1750.
Global developments remain unfavourable with higher US yields while the dollar has hit fresh 2-year highs.
MUFG expects that stresses in the UK bond market will continue in the short term, increasing fears over the UK economic outlook and undermining the government’s economic strategy.
During 2024, higher yields helped underpin the Pound, but the bank notes that the positive correlation can quickly break down.
If investors are selling bonds due to a lack of confidence, this can quickly turn into currency selling as well.
In this context, the bank notes that foreign holdings of gilts have increased to the highest level since 2009.
MUFG notes that the Bank of England is still selling gilts to unwind buying during the quantitative easing programme.
There will be pressure for the BoE to stop sales, but this would be seen as a political endorsement, which would hurt sentiment.
Higher bond yields will undermine the growth outlook and there will also be upward pressure on government debt interest payments, increasing pressure for the government to tighten fiscal policy or shift fiscal rules.
This content was originally published on ExchangeRates.org.uk