HG MARKETS:

The Pound Sterling (GBP) continues to struggle against its major counterparts, weighed down by rising UK government borrowing costs. The 30-year UK gilt yields have surged to 5.36%, their highest level since 1998, putting pressure on Chancellor of the Exchequer Rachel Reeves. Investors have been selling UK gilts due to concerns over higher debt, slower growth, and potential inflationary impacts from the policies of US President-elect Donald Trump, which could lead to economic stagflation. There are worries that rising gilt yields might force the UK government to increase borrowing to cover daily expenses, although Reeves has insisted that public spending will be funded by tax receipts and cuts to public expenditure.

Despite the concerns, the UK government remains committed to avoiding fresh borrowings, with Treasury Minister Darren Jones reaffirming in the House of Commons that the government’s policy of borrowing only for investment is “non-negotiable.” He assured markets that financial conditions remain “orderly” and emphasized that public spending would stay in line with the Autumn Budget. In response to the rise in gilt yields, Bank of England Deputy Governor Sarah Breeden noted that the spike is partly due to uncertainties surrounding Trump’s policies and stated that the evidence supports a gradual withdrawal of policy restrictiveness.

The Pound has weakened to near 1.2275 against the US Dollar (USD), pressured by the USD’s strength ahead of the upcoming US Nonfarm Payrolls (NFP) report. The report, due at 13:30 GMT, is expected to show a slower job growth of 160K in December, compared to the 227K added in the previous month, with the unemployment rate predicted to hold steady at 4.2%. Investors will also focus on wage growth data, which could influence inflation expectations. A strong increase in wages could reignite fears of rising prices, while softer numbers may ease concerns about persistent inflation. Markets are also divided on future Fed rate cuts, with traders expecting no action until at least March 2025, with the May meeting remaining uncertain.