Pound plummets to an eight-month low amid spike in gilt yields and reports of tariffs – London Business News | Londonlovesbusiness.com

A UK asset selloff has led the pound over 1% lower this morning as 10-year gilt yields have spiked to the highest level since 2008, inflation breakevens have risen to 3.58%, and 10bps in Bank of England cuts have been priced out for 2025.

A CNN report suggesting that Donald Trump will declare a national emergency to implement his tariff agenda has compounded sterling’s losses.

For me, this is very much a kneejerk selloff without an immediate obvious catalyst, and I think that we are going to see some recovery quite quickly once the market calms. The moves are related to an ongoing concern about UK borrowing levels but I don’t see enough of a reason for such a rapid market move.

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While not close to the scale of the Truss mini-budget aftermath, sterling is suffering from what I refer to as a ‘bad’ rise in gilt yields. Typically, higher inflation expectations or a hawkish adjustment to the BoE policy stance drive yields higher, and that is bullish for the pound.

In this case, the move is driven not by the macro data, but by heavy gilt supply, concerns about the UK government’s debt sustainability, and the inflationary impacts of the extra fiscal spending in the pipeline. The UK sold £4.3bn of 5-year gilts this morning – the biggest volume at that maturity for over a decade.

It also reflects a wider move higher in longer-dated yields thanks to the stronger US ISM and JOLTS data yesterday.

As longer-dated borrowing costs continue to climb, the Chancellor Rachel Reeves’ fiscal headroom continues to contract, increasing the likelihood that further tax rises will need to come down the line to meet her fiscal rules. Businesses have already blamed the increase in employers NI for weaker levels of confidence, stalled hiring, and weaker growth in the fourth quarter.

Meanwhile, uncertainty over the nature of Trump’s tariff plans continues to generate volatility. While assumingly it is dulling the impact of the WP report earlier this week, I think an emergency declaration was always likely to be the route towards trade policy implementation as swiftly as possible.