The pound slid to its weakest value against the US dollar since November 2023, trading at $1.21 on Monday, as concerns over global and domestic economic issues fueled a sell-off. Simultaneously, UK government borrowing costs reached their highest levels in years, further intensifying market pressure.
The yield on the 10-year gilt, a benchmark for government borrowing, climbed to 4.86%, its highest point since 2008. Meanwhile, 30-year gilt yields surged to 5.42%, a peak not seen in 27 years.
Global and Domestic Pressures
The rise in borrowing costs aligns with trends across Europe, with government debt costs in Germany, France, Spain, and Italy also increasing on Monday. Analysts attribute much of the market turmoil to the re-election of former US President Donald Trump and his proposals for new tariffs, which have heightened fears of persistent inflation.
Adding to the pressure, robust US jobs data released on Friday bolstered expectations that US interest rates will remain elevated for longer, strengthening the dollar and weakening other currencies, including the pound.
However, domestic factors have also played a role in the UK’s struggles. Emma Wall, head of platform investors at Hargreaves Lansdown, argued that measures announced in the recent Budget have exacerbated inflation. “If you can get inflation under control, you will see interest rates come down in the UK,” she said.
Political and Economic Fallout
The developments have sparked political debate. Over the weekend, Chancellor Rachel Reeves defended her trip to China to strengthen economic ties, despite rising gilt yields at home. The Labour government has faced criticism from opposition Conservatives, who accused Reeves of “fleeing to China” during a critical economic moment.
Reeves countered that agreements secured in Beijing would bring £600 million to the UK economy over the next five years, reinforcing the need for international collaboration.
The chancellor also reiterated her commitment to fiscal rules aimed at managing government debt and spending, describing them as “non-negotiable.” Despite her assurances, some analysts question whether the government can meet these targets without introducing further cuts or tax increases as borrowing costs climb.
Confidence in Leadership
Prime Minister Sir Keir Starmer defended Reeves on Monday, dismissing speculation about her position. “She has my full confidence. She has the full confidence of the entire party,” he stated, underscoring Labour’s united stance amid mounting economic challenges.
As market dynamics evolve, the combination of international influences and domestic policy decisions will likely remain central to shaping the UK’s economic trajectory.
