By Amanda Cooper
LONDON (Reuters) -The pound drifted on Thursday, in what has been its most volatile week in months, as investors grow increasingly nervous about Britain’s finances and the government’s ability to keep them under control, which has rattled the bond market too.
Sterling traded a shade higher at $1.3455, heading for a third weekly decline. The pound was also steady against the euro, which held at 86.67 pence.
Yields on 30-year British government bonds, or gilts, briefly shot up this week to their highest since 1998, swept along in a rout that has punished the long-dated debt of most major economies.
Typically, higher yields would support the pound. But when that increase in borrowing costs is the product of concern about the outlook for inflation, rather than that of optimism that longer-term growth looks robust, the currency suffers.
Bank of England Governor Andrew Bailey on Wednesday suggested that British interest rates would continue to fall, but there was far less certainty about the pace of cuts.
“There is now considerably more doubt about exactly when and how quickly we can make those further steps,” Bailey told a hearing of the House of Commons’ Treasury Committee, reiterating his comments after August’s rate cut.
The derivatives market shows traders are assuming the BoE will almost certainly cut rates at its meeting on September 18, but the picture beyond that is fuzzier.
“There is just an 18% chance of a cut in November, a month ago there was a 67% chance of a cut. Thus, UK yields may be able to reverse recent gains, but we still expect UK yields to remain higher than our peers’ yields for some time,” Kathleen Brooks, research director at XTB, said.
“With uncertainty likely as we lead up to the budget in November, we believe that sterling peaked in July at $1.38, and may trade sideways below $1.35 in the short term.”
Finance minister Rachel Reeves presents her autumn budget on November 26. Reeves is under pressure to keep the government’s finances on track and has vowed to keep a grip on spending to help bring down inflation and borrowing costs.
Bond investors are concerned. Britain has the highest borrowing costs among the Group of Seven advanced economies. A 10-year gilt yields 4.74%, compared with 4.2% for an equivalent U.S. Treasury and 1.6% for low-yielder Japan.
(Reporting by Amanda Cooper; Editing by Alex Richardson)
