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Pound falls below $1.23 to 14-month low
The pound has dropped to its lowest level in 14 months during early trading in London, driven by a sell-off in the bond market that has raised concerns about UK assets.
Sterling has fallen by over one cent against the US dollar, trading around $1.226, its weakest value since November 2023. This decline highlights ongoing apprehensions regarding surging UK borrowing costs, coinciding with a generally strengthening dollar.
Michael Brown, a senior research strategist with Pepperstone, expressed significant concern over the current economic climate in the UK.
Brown stated to clients:
The increasing yields coupled with a depreciating currency is a worrying indication of a loss of confidence in the government’s management of fiscal policy. While we haven’t reached the crisis levels seen during the Truss/Kwarteng era, the situation is precarious.
Brown commented on his investment strategy, indicating a preference for being ‘short GBP’—essentially betting against the currency’s value.
Even with the recent dip, the pound remains above the record lows witnessed after the 2022 mini-budget debacle, when it neared parity with the US dollar.
Updated at 08.46 CET
The decline in the pound complicates the Bank of England’s plans to lower interest rates as early as 2025.
While market expectations previously included two quarter-point rate cuts by the end of the year, recent trends have slightly diminished the likelihood of an immediate rate decrease.
Jim Reid from Deutsche Bank explained:
The weakening of sterling has prompted doubts about the Bank of England’s ability to implement rate cuts as swiftly as once thought. Consequently, expectations for rate adjustments by December have moderated, indicating growing economic unease.
The combination of rising yields, fears of breaching fiscal rules, and a weakened currency exacerbates inflationary pressures, further complicating the economic landscape.
Greggs warns lower consumer confidence is hitting sales
Baking chain Greggs has highlighted challenges due to declining consumer confidence, adversely affecting its sales performance.
Greggs reported a slowdown in sales growth, with a mere 2.5% rise at company-managed stores for the last quarter of 2024, which is significantly less than the full-year growth of 5.5%.
Greggs identified a more challenging market environment in the latter half of 2024, attributing the decline to reduced foot traffic as consumer sentiment weakens.
Chief executive Roisin Currie stated:
As consumer confidence dips, we believe our commitment to value and quality will help us navigate the economic headwinds ahead, and we remain optimistic about long-term growth prospects.
Shares in Greggs plummeted by 9.5% this morning following the announcement.
Tesco and M&S shares fall despite strong Christmas trading
Despite reporting robust sales during the Christmas season, leading UK retailers are witnessing drops in their stock prices.
Tesco announced its most successful Christmas yet, with a 4% sales increase across established UK stores over the six weeks leading to January 4. However, its shares fell by 1.6% this morning.
Marks & Spencer also experienced positive results, reporting an 8.9% increase in like-for-like food sales over the 13 weeks to December 28. Nonetheless, M&S warned that ongoing economic pressures create a challenging environment, leading to a 6% drop in its share price this morning.
Meanwhile, discount retailer B&M noted a 2.8% increase in UK sales during the last quarter of 2024, although its shares fell by 10% after narrowing its profit growth forecast.
Bond panic makes the front pages
The recent turmoil in the bond market has garnered significant media attention across top UK newspapers.
The Daily Telegraph reported on a statement from the Treasury asserting an ‘iron grip’ on public finances, describing it as a move intended to stabilize the market.
The Daily Mail characterized the rising borrowing costs as a “red alert” for Chancellor Reeves, who might need to consider budget cuts or tax increases to adhere to fiscal rules.
The i echoed concerns, citing that Britain’s borrowing costs have reached a troubling level.
UK bond sell-off continues
Today, UK borrowing costs are once again on the rise, despite government efforts to stabilize market conditions last night.
The yield on benchmark 10-year UK government debt increased by 12 basis points, climbing to 4.921%, the highest level since 2008. Concurrently, yields on 30-year bonds also rose to 5.474%, reflecting heightened investor concerns about UK economic forecasts.
These trends indicate ongoing anxieties about weak growth and persistent inflationary pressures, particularly in light of the Treasury’s ineffective attempts to reassure the market.
Britain’s bond turmoil invokes memory of 1976 debt crisis
Martin Weale, a former policymaker at the Bank of England, has drawn parallels between the current market situation and the 1976 debt crisis.
The year 1976 is notable in UK economic history due to the significant devaluation of the pound that led to a government bail-out from the International Monetary Fund, accompanied by stringent spending cuts.
Weale indicated that the rise in borrowing costs and depreciation of the pound are reminiscent of the conditions leading up to the IMF intervention in 1976.
Weale, who teaches economics at King’s College London, expressed concern:
The current combination of a declining pound and increasing long-term interest rates echoes the crisis of 1976, which ultimately required an IMF intervention. While we haven’t reached that crisis point, the current climate is disconcerting for policymakers.
Rachel Reeves heading to China this week to build bridges
The pound’s decline coincides with Chancellor Rachel Reeves’s imminent trip to China aimed at strengthening UK-China relationships.
Accompanied by financial executives, Reeves will engage in discussions designed to foster economic growth through enhanced ties with Beijing.
Our economics editor, Heather Stewart, noted that UK businesses have requested Reeves to advocate for China not being categorized under a stricter foreign influence registration scheme proposed by the Home Office.
The Chancellor’s delegation will include the Bank of England Governor Andrew Bailey and FCA Chief Executive Nikhil Rathi, seeking to underscore the significance of the financial services sector during their meetings.
Reeves is scheduled to meet China’s Vice-Premier He Lifeng in Beijing before continuing to Shanghai for dialogues with UK firms operating within China.
Strengthening cooperation in financial services forms a core component of the objectives for this trip, reflecting Reeves’s prior commendations of the sector as a crucial element of the UK economy.
The agenda
10am GMT: Eurozone retail sales for November
12.30pm GMT: Challenger survey of US job cuts in December
4pm GMT: Bank of England policymaker Sarah Breeden gives speech
Source
www.theguardian.com