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A crazy day in UK politics led to a sharp fall for sterling and new fears around the bond market.
The pound weakened by over a cent against the euro and by almost two cents against the US dollar on Wednesday, a day that saw one of the most remarkable Prime Minister’s Questions (PMQs) of recent times. Despite stabilising in the evening session, sterling will be heavily scrutinised today, while any further movement in the bond market might prompt a full-blown crisis.
Evoking painful memories of the Liz Truss premiership, Sir Keir Starmer neither ruled out future tax rises nor guaranteed his chancellor’s job security at the dispatch box. Beside him, Chancellor Rachel Reeves could only watch on, visibly upset.
Downing Street would later claim Reeves was “going nowhere” and retained the full trust of the prime minister. But, perhaps understandably given the optics in the House of Commons, as well as Labour’s recent streak of U-turns, currency traders didn’t appear to put much stock in this.
Wednesday’s circus was the direct result of a rebellion by Labour MPs over planned welfare cuts. After a similarly dramatic climbdown from the government on that issue, markets had been spooked by a looming “black hole” in the public finances. Experts are predicting that the government will now have no choice but to break its key manifesto pledge not to raise taxes for working people in order to balance the books.
As is often the case, the bond market led the febrile reaction. The yield on some UK government debt – which moves inversely to the price – soared higher than during the 2008 Great Financial Crisis, suggesting little desire to invest in Britain and piling even more pressure on the government’s budget.
Ironically, it was a day of eerie quiet outside of these isles. Today is a little more intriguing from a data perspective, as we’ll get another look at American labour statistics this afternoon.
So, what does all this mayhem mean for your business in plain English? Simply put, things could get worse before they get better. As a result, we would strongly recommend giving us a call to discuss how we can take that sizeable risk off your plate.
Make sure any upcoming transactions are protected against the risks of sudden market movements. Secure a fixed exchange rate now with a forward contract; call your account manager on 020 3918 7255 to get started.
GBP: Déjà vu
Bond market stress, sterling under the cosh, a government in freefall. Is this 2022 all over again? Maybe not, but the pound has seen this story play out before. A huge fall for sterling meant questions swirled for the government, the chancellor and the UK economy itself. It’s likely to be a bumpy ride into the weekend.
GBP/USD: the past year
EUR: Highest since April
The euro ended Wednesday at its highest level over the pound since early April, when Donald Trump’s tariff regime caused a similar stir to that in Westminster yesterday. Things are also going well for EUR/USD, which has strengthened close to a four-year high.
GBP/EUR: the past year
USD: BBB moves to the House
Donald Trump’s “Big, Beautiful Bill” has cleared a major hurdle in the Senate (with the help of the vice president’s tiebreaking vote), but it now must navigate a perilous path in the House of Representatives. The Republicans have staked their fiscal legacy on this package, and the US dollar is watching on tenterhooks.
EUR/USD: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 7898 0500 or your Private Client Account Manager on 020 7898 0541.
