Market Report - 09/01/2025
The Pound plummets to 14 month lows
It has been a busy start to 2025, with a host of economic data releases and political talking points this week, resulting in a fair amount of volatility across major currency pairs, leading the Pound to plummet to 14-month lows.
The week started well for the Pound as it rose over 1% against the US Dollar, off the back of reports that had suggested that President elect Donald Trump’s advisers were considering only applying tariffs to “critical imports”, which would ultimately represent a watered-down approach to Trump’s initial plans for tariffs.
Donald Trump had threatened big US tariffs on all imports to try and boost the domestic economy. These reports helped the Pound climb to 1.2550, only a week after it had dropped to its lowest level since April, trading around 1.2350, following some Dollar strength as a result of boosted expectations for economic growth in the 2025.
However, this positive move the Pound was relatively short lived, as Donald Trump was swift to deny any plans to water down tariffs and claimed the reports were “fake news” – leading GBPUSD back down into the 1.24’s at the time.
Another contributor to the Pound’s fall off after reaching 1.2550 came as a result of the services PMI survey, released on Monday. The survey came in at 50.4, just over the all-important 50 mark that separates expansion from contraction, more importantly it came in below expectations. This means that Britain’s private sector barely expanded last month, recording the lowest business activity since October 2023, as firms in the dominant services laid off staff at the fastest rate since January 2021, when a Covid lockdown was in force.
Furthermore, confidence among British businesses has now plummeted to the lowest levels since ex-PM Liz Truss’ infamous mini budget that caused chaos in 2022. A survey from the British Chambers of Commerce has revealed that the Autumn budget’s large tax increases have concerned UK businesses, with confidence in sales over the next 12 months now reaching its lowest level since 2022.
After 2 days of consecutive rises in UK borrowing, Britain finds itself in the midst of a bond market panic, with the Pound dropping to a 14-month low in early trading. Sterling is feeling the full impact of the bond market sell-off and has seen GBPUSD is in freefall, trading as low as 1.2238, its lowest level since November 2023. Yesterday saw the yield on 10-year UK government debt hit its highest since the 2008 financial crisis, a day after the 30-year bond yield hit its highest level since 1998 - The panic in the market combined with continued US Dollar strength has been a disaster for the Pound.
Despite the panic, Chancellor Rachel Reeves has suggested she has an “iron grip” on the countries finances, but if things do not calm by March, when the spring statement takes place, it will leave her little choice but to begin cutting government spending. These events in the last 24 hours has led to speculation that the chances of a rate cut in February from the Bank of England could become less likely, with investors now beginning to dial back expectations. The BoE had outlined intentions to cut multiple times this year, with two already priced-in, but with the rise in yields weakening the Pound, inflationary pressures will likely increase.