LONDON, March 23 (Reuters) – The pound slid against the
dollar on Monday as investors flocked to the U.S. currency amid
a selloff in global stocks, even while bond yields jumped as
traders priced in four interest rate hikes from the Bank of
England this year.
British 10-year Gilt yields rose to 5.079%, their
highest level since 2008, as markets braced for a response to a
potential inflationary shock from the Iran war. Yields rise as
prices fall and vice versa.
Sterling fell 0.47% against the dollar to $1.328.
The pound rose 0.9% against the U.S. currency last week as
investors bet the UK’s reliance on energy imports would force
the BoE to push interest rates above those of the Federal
Reserve, boosting the relative appeal of the pound.
However, the dollar rallied on Monday as global stocks tumbled
and investors moved into safe-haven assets, and as investors
also started to contemplate a potential Fed rate hike.
“Our sense is that yields have risen past the point where
further increases are likely to be constructive for the pound,”
said Nick Rees, head of macro research at Monex Europe.
He cited “downside implications for growth, and the adverse
impact this will have on already stretched public finances”.
The euro was last down 0.1% against the pound at
86.64 pence as investors priced in four rate hikes from the BoE
in 2026 – a dramatic reversal from the two cuts that were
expected this year as recently as late February.
“Since the start of the conflict, the pound has held up
relatively well,” said Jane Foley, senior FX strategist at
Rabobank. “We attribute this to the sharp turnaround in
expectations regarding BoE policy.”
Yet Foley said the 2022 Liz Truss “mini budget” crisis showed
that the pound can be vulnerable if longer-dated UK bonds
tumbled.
The pound slid to a record low of $1.033 while Gilt yields
surged during that episode as investors dumped UK assets.
Foley said she sees the risk that the pound slips to $1.32
in the coming weeks and that the euro could rise against
sterling in the medium term.
British Prime Minister Keir Starmer is set to hold an emergency
meeting with senior ministers and BoE Governor Andrew Bailey
later on Monday to discuss the response to the energy shock
stemming from the war.
