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Debt worries continued to hold sway over currency markets on Wednesday.
The pound steadied itself on Wednesday after another government bond selloff led to steep falls against its rivals earlier this week. Sterling strengthened by a third of a cent against the euro and clawed back a full cent against the US dollar yesterday, but it still has some way to go to reach weekly parity. The yield on 30-year debt meanwhile fell back below 5.7%, reversing most of Tuesday’s surge.
Stability was welcome but it’s unlikely to change much for Chancellor Rachel Reeves. Facing an ever-widening gap in public finances, Reeves announced yesterday that the government had opted for an unusually late autumn budget, presumably to allow the dust to settle. You can now pencil that into your diary for 26 November.
The UK could at least console itself in the knowledge that it was far from a special case. With markets back from their summer holidays, debt-laden governments around the world have been given short shrift by markets. The United States saw its treasuries spike, while the rout was so severe in Japan it led to fears that Prime Minister Shigeru Ishiba would be forced to step down.
Despite the chaos to begin September, the Bank of England’s Alan Taylor found reason to be hopeful. The economy is “getting closer to that soft landing”, Taylor observed in his annual report to parliament, “but we are also in a fragile moment, and monetary policy will need to be carefully calibrated in the coming months to keep us on track.”
However, Governor Andrew Bailey followed that opinion with some more robust language. The path of interest rates should still be downward, yet there was now “considerably more doubt” around the speed and scope of future cuts.
Wednesday was a better day for financial markets in general, with European stocks rising to almost recover after Tuesday’s shock. We also learned that activity in the UK services sector was revised up to its highest level in over a year in July, as lower interest rates helped support businesses.
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GBP: A double-edged sword
A later than usual autumn budget may prove something of a double-edged sword for the pound. Time is a valuable commodity for the Treasury, but rumours and anxieties will no doubt swirl between now and the end of November.
GBP/USD: the past year
EUR: Insulated, for the most part
As Conservative leader Kemi Badenoch pointed out in the Commons yesterday, the UK now has a higher cost of borrowing than Greece. This is largely the result the eurozone having a lower debt to GDP ratio than the UK, as well as substantially lower interest rates. For now, the euro is benefitting from being able to mostly stay out of this fight.
GBP/EUR: the past year
USD: Job openings fall to ten-month low
The number of job openings in the United States fell to a ten-month low of 7.18 million in July, thousands below market forecasts. That shock was enough to force the US dollar lower against its rivals and resurrect concerns about the impact of the trade war.
EUR/USD: the past year
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