Sterling is still sitting close to its strongest against the euro since the early summer of last year, but that was about the only comfort the pound took from Wednesday. It slipped against the US dollar, as did almost everything else, because the real action was happening in bond markets.
Tuesday’s calm lasted precisely one day. Government borrowing costs jumped on both sides of the Atlantic. The yield on ten-year US government debt touched its highest level since 2002, and the cost of 30-year UK borrowing climbed to levels last seen in early 1998. Those are not numbers anyone in Washington or Whitehall wanted to see on a Wednesday afternoon.
The reasons are familiar, which is part of the problem. Oil is back around $100 a barrel after fresh attacks around the Strait of Hormuz, Houthi strikes on Saudi Arabia and a storm heading for the US Gulf coast. Higher energy costs feed inflation fears. Inflation fears push up interest rate expectations. And governments that are already borrowing heavily find lenders asking for more in return. Stock markets, which had been setting records on Tuesday, retreated accordingly.
The dollar was the obvious winner. Holding US government debt now pays more than at any point in over two decades, and for currencies that matters more right now than last week’s surprisingly weak jobs figures. The euro went the other way. The relief that greeted steadier French borrowing costs on Tuesday evaporated. French yields jumped far faster than Germany’s and the euro slid back towards its weakest against the dollar in 17 months.
Closer to home, the pound’s strength against the euro looks more fragile than the headline suggests. The jump in long-term UK borrowing costs was sharper than the move in the US, and it arrives three weeks before Chancellor John Healey’s first Budget. He met the banks that deal in government bonds on Tuesday. On Wednesday the Treasury went out of its way to reaffirm its commitment to the fiscal rules, which is the sort of thing governments say when they would rather markets stopped asking.
So the question is whether this is a brief bout of nerves or the start of a more stubborn repricing of government debt. The UK Budget and a US interest rate decision land on the same day later this month, with the European Central Bank (ECB) and the Bank of England following within a week. The next few weeks will decide whether sterling’s lead over the euro holds, or whether bond markets come for the pound next.
GBP: Mortgage market feels the squeeze
The gilt sell-off is already reaching household finances, with lenders withdrawing some of their cheapest mortgage deals. Bank of England Deputy Governor Clare Lombardelli speaks today, a few weeks after three of the nine members of the Monetary Policy Committee (MPC) voted to raise interest rates. Any hint that higher market borrowing costs might do some of the Bank's work for it will be read closely ahead of November's decision.
GBP/USD: the past year
EUR: The ECB's awkward bind
Eurozone inflation rose to 3.8% in September, its highest in around three years, which argues for more interest rate rises. Every jump in French borrowing costs argues for caution, though. Today's account of the ECB's September meeting should show how worried policymakers were about that tension, on the same day French students return to the streets against spending cuts.
GBP/EUR: the past year
USD: Yields drown out jobs
The dollar has shrugged off news that the US economy added only 29,000 jobs in September, because rising yields have given investors a better reason to hold it. Minutes of the Federal Reserve's September policy meeting, published last night, showed most officials think another rate rise will probably be needed before the year is out, with almost all seeing the risks to inflation tilted upwards. The dollar has given back a little ground this morning, but US inflation figures on 14 October will be the next real test of how far the Federal Reserve is prepared to go.
USD/GBP: the past year
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