GBP underperforms as Gilts remain weak - Scotiabank

The Pound Sterling (GBP) fell to its lowest since 2023 before steadying. UK 1OY yields rose 120bps in a handful of disorderly trading days either side of the infamous 2022 UK budget and required the BoE to step in a stabilize the markets, Scotiabank's Chief FX Strategist Shaun Osborne notes.

GBP rebounds from intraday low

"GBP also dropped 5%. The sell-off in UK debt over the past month or so has taken UK 10Y yields up 60bps or so, twice the rise in core Eurozone debt yields but less than US 10Y Treasurys amid general weakness in sovereign bond markets."

"The government may have a problem making its fiscal math work under a higher rate regime (which will likely entail spending cuts or more revenue enhancements ahead) and a falling exchange rate alongside rising yields is not a comfortable sight but this is not a repeat of 2022. Keep your lettuce in the fridge for now."

"A new cycle low for Cable (lowest since November 2023) keeps the broader outlook for the pound negative. But there are signs from the intraday pattern of trade that a minor low is developing via a bullish 'hammer' pattern on the 6-hour chart which may help the GBP steady in the short run. Gains may retest the mid-1.23s but it will take price moving well above 1.24 to stabilize the technical tone at this point I think."