Currency traders are ramping up their bets against the pound as political paralysis grips the Government, official figures show.
In an ominous vote of no confidence in Labour, speculators have been steadily increasing their sell positions in recent weeks as concerns grow of a lurch to the Left after a protracted leadership challenge to Sir Keir Starmer.
Sterling fell for the fifth day in a row on Friday, dropping to $1.33 after the path was cleared for Manchester mayor Andy Burnham to stand for Parliament as a first step to ousting the Prime Minister.
A weaker pound means costlier foreign holidays and more expensive imported goods, such as fuel, food and electrical items.
It could also lead to higher mortgage rates if interest rates have to rise to prop up the currency.
Fears that the fiscal rules to limit borrowing could be loosened to fund more welfare spending have already led to a surge in borrowing costs since Labour was routed in this month’s local elections.
The yield – or interest rate – the Government pays on its benchmark ten-year gilts topped 5 per cent to reach its highest level since the 2008 financial crisis, as the prospect of Burnham being handed the keys to No.10 spooked investors.
He has previously said Britain should not be ‘in hock’ to the bond markets.
Yields rise as gilt prices fall, and worryingly, the sell-off in gilts – UK Government bonds – is spilling over into currency markets, threatening a full-blown run on the pound.
Traders have been negative on the currency for almost a year. But the latest data from the Commodity Futures Trading Commission, the US financial markets regulator, show that up to 64,000 net bets have been taken out against sterling worth almost £4 billion – the most in two months.
The pound had held its value. But the surge in Government borrowing costs and renewed political instability is alarming traders.
Fighting talk: The path has been cleared for Manchester mayor Andy Burnham to stand for Parliament as a first step to ousting the Prime Minister
‘Politics is hammering sentiment towards sterling,’ said Neil Wilson of investment bank Saxo.
Others, such as Mark Dowding of asset manager RBC BlueBay, are dumping the pound. He said: ‘UK financial assets and sterling seem likely to be subjected to an elevated political risk premium for an extended period.’
Britain increasingly depends on foreign investors to pay its way in the world, with more than a quarter of its national debt held abroad.
They lend to the Government to fund the gap between what it spends and what it raises in taxes.
But, crucially, Britain also runs a trade deficit – where imports exceed exports – which puts extra downward pressure on the pound because the UK must sell sterling to buy foreign currency to pay for imported goods and services.
‘We are reliant on the kindness of strangers, so any sell-off in gilts would be likely to take the pound lower,’ said Jane Foley at investment bank Rabobank.
The last time bonds and sterling fell in tandem was following the disastrous Liz Truss mini-Budget in 2022 when hidden borrowing was exposed in parts of the pension system that led to a Bank of England bailout of the sector.
Government borrowing costs are even higher now, though they have not risen as fast as four years ago, while sterling is well above the near-parity it briefly sank to against the dollar back then.
The bond sell-off has also hit the value of millions of workplace pensions, especially for those approaching retirement who are automatically ‘de-risked’ into supposedly safe ‘lifestyle’ funds that mainly invest in bonds and other fixed income investments.
‘If you own bonds in your pension or elsewhere you will find their value has fallen significantly – by 20 per cent in the past few days for some gilts – and there’s no upside,’ said industry expert Henry Tapper.
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