Sterling Struggles: UK's Fiscal Future in Focus

The British pound has continued to decline against major currencies due to concerns over the UK's fiscal sustainability as government bond yields rise. Despite high yields typically supporting a currency, analysts predict increased borrowing costs may lead to government spending cuts, affecting future growth.

The British pound extended its decline against the dollar and euro on Monday, driven by investor concerns regarding the UK's fiscal sustainability as gilt yields rose for the sixth consecutive day. Sterling reached its lowest level since November 2023, and analysts predict the trend may continue.

Currency traders attribute the slide in the pound to rising US bond yields amid inflation concerns and the reduced likelihood of interest rate cuts by the Federal Reserve. Additionally, strong US labor data has intensified global bond yield increases.

Despite high yields often propping up a currency, analysts anticipate higher borrowing costs will require the UK government to reduce spending or increase taxes, potentially hindering growth. British inflation data released this week will be crucial in shaping expectations around potential future rate cuts by the Bank of England.

(With inputs from agencies.)