Posted By Global Banking and Finance Review
Posted on January 8, 2025
By Greta Rosen Fondahn
(Reuters) -Sterling slid for a second day on Wednesday against a generally firmer U.S. dollar, despite British long-term borrowing costs sitting at around their highest since 1998.
Solid U.S. data on Tuesday confirmed investors' view that U.S. interest rates will stay higher for longer, pushing up Treasury yields and boosting the dollar against most major currencies.
"Political risks aside, there is little reason to be bearish on the U.S. dollar - even if current levels look a little overdone," said Michael Pfister, FX analyst at Commerzbank.
The pound was last down 1.1% at $1.2342, after sliding 0.34% on Tuesday.
It was also weaker against the euro, which was last up 0.6% at 83.35 pence.
That fall came even as yields on British government bonds, known as gilts, spiked higher, rising more than U.S. Treasury yields on Wednesday.
Britain's long-term government borrowing costs are at their highest since 1998, with 30-year gilt yields last up 10 basis points (bps) on the day at 5.34%.
The 10-year yield rose to its highest since October 2008, last up 10 bps at 4.78%.
"This is a global move but it's being led by the UK," said RBC fixed income strategist Megum Muhic.
Investors expect the Bank of England to cut interest rates by only about half a percentage point this year, with inflation likely to hover above the central bank's 2% target.
"The way Gilts are trading would suggest that participants are becoming increasingly concerned over the perilous UK fiscal outlook," said Michael Brown, strategist at Pepperstone.
Markets will be looking for signals of what is to come from Bank of England Deputy Governor Sarah Breeden when she speaks about the outlook for UK inflation and monetary policy in Edinburgh on Thursday.
So far, higher yields have offered the pound little support against the dominant dollar, with sterling trading at its lowest since April.
Compared to a resilient U.S. economy, where Tuesday's data showed that job openings unexpectedly rose in November and layoffs were low, Britain's economy lost momentum in the second half of 2024.
The British Retail Consortium said on Tuesday that sales in the final quarter of 2024 proved disappointing.
"Stagflation remains the 'mot du jour'," said Pepperstone's Brown.
(Reporting by Greta Rosen FondahnEditing by Mark Potter and Peter Graff)
