Cable Tumbles Despite Soaring Yields

Cable has been dragged lower despite surging UK government bond yields as concerns over Britain's economic outlook weighed on the currency.

Are Concerns Serious?

Interest rates on Britain's benchmark government debt have spiked since the new year began, with . The move occurred despite the BOE shifting towards easing in late 2024, though interest rates remain well above pre-pandemic levels. While the surge triggered memories of the Mini-Budget crisis that ended Liz Truss' premiership, government officials and analysts point out fundamental differences in the current situation.

Soaring yields stem from and the government's ability to fund its spending commitments. In fact, higher borrowing costs have reduced the government's financial headroom, creating some sort of self-fulfilling prophecy. And following the UK's Debt Management Office's 30-year bond sale on Tuesday, which saw a lack of demand, this pushed interest rates higher. However, the trend extends beyond the UK, with yields rising across the US and Europe. Some analysts attribute the movement partly to a lack of market liquidity at the start of the year, suggesting potential normalisation ahead. Nonetheless, market participants remain cautious about the lack of liquidity.

A New Trend or a Reversal?

Some analysts behind the drop the pound experienced over the past few trading sessions. However, others blame the economic strain caused by the Budget despite its announcement occurring months ago. While the timing raises questions, some point to a perfect storm of factors to explain it: sticky inflation limiting BOE easing to two rate cuts this year, high interest rates and market uncertainty ahead of the expected Trump presidency and its potential tariff implications.

Just on Thursday, the British despite the government attempting to maintain orderly markets. The lack of financial headroom on the heels of increased borrowing costs will likely pose challenges for Chancellor Rachel Reeves. It may even force her to introduce spending cuts or tax hikes she has previously been reluctant to implement. The duration yields remain at elevated levels for could determine how long the decline in the pound lasts. On the one hand, if yields normalise soon, the impact on government finances will likely be minimal, easing concerns. On the other hand, if the situation worsens or yields remain at high levels, the pound may see renewed pressure. This could result in a chain reaction that could further weaken UK equities.​

Falling Wedge Signals Reversal

Cable could have ended a falling wedge recently, which is considered a bullish reversal. Price action shows the pair trading under the lower end of the pattern, known as undershooting, with short-term support sitting at 1.2237. A break in the wedge's territory could signal a potential reversal, eyeing the 1.2350 region initially. Higher up, bulls may encounter resistance at 1.2485, 1.2580 and the trend-setting 1.2813 level. However, failure to hold above 1.2200 might cause the pair to test lower levels toward 1.2150 and the 1.2000 handle, invalidating the wedge pattern. Having declined steadily from 1.3047 to 1.2485, the downside extends an equal distance from the lower peak of 1.2580.

Source: SpreadEx / GBPUSD

Key Takeaways

Pound’s drop from rising gilt yields and economic uncertainties differs from the 2022 Mini-Budget crisis and may correct soon if yields stabilise. But while global bond markets face similar challenges, the UK remains concerned about growth and fiscal sustainability, which saw sterling leading the decline. The combination of sticky inflation, limited BOE rate cut expectations and broader market uncertainty may continue to weigh on the outlook unless yields lose some steam.