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The pound fell to its lowest level since November 2023 on Thursday, as the UK currency was swept up in a bond market sell-off that threatens to derail the Labour government’s fiscal plans.
In early trading in London, the pound weakened 0.8 per cent to $1.2269 as investors braced for another volatile day in the gilt market.
The currency has been buffeted by the strains in the bond market as investors worry about the government’s heavy borrowing needs and the growing threat of stagflation, which combines lacklustre growth and persistent price pressures.
“The economy is entering stagflation,” said Mark Dowding, chief investment officer at RBC Bluebay Asset Management.
Sterling has also been hurt by a resurgent dollar, which has strengthened as a string of recent US data has bolstered investor confidence in the world’s largest economy.
The dollar index, which measures the currency against a basket of six others, was up 0.1 per cent on Thursday.
Chancellor Rachel Reeves left herself a slender £9.9bn of headroom against her revised fiscal rules in the Budget even after announcing a £40bn tax-raising package that aimed to “wipe the slate clean” on public finances.
Increases in government debt yields have since put that budgetary wriggle room under threat. The level of bond yields is an important determinant of the budget headroom given its implications for the government’s interest bill, which exceeds £100bn a year
On Wednesday UK 10-year borrowing costs rose to their highest level since the global financial crisis. Analysts said Wednesday’s simultaneous sell-off of gilts and the pound carried echoes of the reaction triggered by Liz Truss’ “mini” Budget in 2022.