MacroResearchBoard

U.K.: Between A Rock And A Hard Place – January 21, 2025

A just-published report examined the darkening clouds looming over the U.K. Gilt market and the U.K. economy. Bond yields have surged and the pound/U.S. dollar exchange rate has dropped sharply in recent months.

The report concluded that concerns about another “Truss crisis” are misplaced, or at least premature. The downward pressure on U.K. bond prices and the £/$ rate have been driven primarily by external forces. U.K. bond yields have not risen relative to U.S. yields and the pound has been hit by broad-based U.S. dollar strength – in fact, the pound was at a post-Brexit vote high against the euro just one month ago.

Nevertheless, the U.K. has a structurally weak fiscal and economic backdrop that is being aggravated by ineffective political management and rising Gilt yields. The government has limited fiscal capacity to promote growth, but needs to markedly improve its messaging to support business confidence and investment.

Net: we do not expect a 2022-like crisis to develop, although investor jitters will likely persist.