The GBP/USD pair dropped to about 1.3625 during Thursday’s Asian session, mainly due to selling pressure on British government bonds. Traders are awaiting important US economic data, including Nonfarm Payrolls, Unemployment Rate, and Average Hourly Earnings, later today. UK government bonds have seen their biggest drop since October 2022, triggered by cuts to benefits and raising concerns about the finance minister’s role. The UK’s debt situation is now in the spotlight, likely leading to more selling pressure on the currency pair.

Rising UK Bond Yields

On Wednesday, GBP/USD fell below 1.3600 due to rising UK bond yields, although there were some attempts to recover. UK Prime Minister Keir Starmer’s struggle to implement welfare cuts has created economic instability, and potential tax increases are unsettling the market. Amid political turmoil, the Pound sharply fell, losing over 1% or 170 pips against the US Dollar. Unrest within the Labour Party led to the removal of a key clause from the welfare reform plan, costing an expected £5 billion in savings by 2030. This instability has significantly impacted market dynamics. The recent decline of the Pound reflects more than just short-term sentiment; it indicates tightening domestic conditions and political uncertainties related to fiscal credibility. Initially a response to rising bond yields, the situation has become more complex. By the time the pair hit 1.3625 on Thursday, much of the damage was done, albeit with brief recovery moments that felt more like a reflex rather than a change in trend. The selloff in UK gilts, the steepest since late 2022, was not only driven by external rate expectations. It followed the government’s decision to retract benefit reforms, eliminating billions in projected savings. Investors are now reevaluating the fiscal outlook, which increases pressure on long-term debt and impacts exchange rates. Ignoring these factors means overlooking the link between fiscal credibility and currency strength.

Fiscal Policy Impact

The strained position of Reeves intensifies bond volatility. Traders viewed the reduced welfare cuts not as kindness but as a gap in the budget. The loss of expected savings raised the likelihood of tax hikes appearing soon. This shift led to aggressive trading, resulting in gilts selling off and the Pound dropping over 1% in a single session. Whether this forms a longer downward trend will depend on US job data and developments in Westminster’s policy direction. The removal of the clause from the proposal, under pressure from within the ruling party, complicates efforts to regain the market’s confidence. Anyone trading UK assets is aware of the internal rifts that have affected this pair’s decline. We see this situation as a repositioning phase rather than a mere downturn. Unless there is a significant shift in fiscal communication, the outlook for Sterling appears negative. Economic announcements from Washington matter—each payroll release or wage number adds to speculation about future Fed actions—but Sterling’s weakness stems primarily from domestic issues this week. Expect short-term volatility around US data releases. However, if UK fixed income markets remain unstable, support levels on the GBP/USD pair may be tested again. We are closely monitoring liquidity in the front end of the curve. If gilts remain under pressure, the Pound may struggle to find reliable buyers. Any rallies near the 1.3650 level may be short-lived, particularly if domestic uncertainty grows. It’s not solely about rates; perceived political unity also plays a role. Starmer’s loss of control over the reform discussion has unsettled bond desks in London. When yields rise not because of policy normalisation but due to concerns over fiscal discipline, currency risk premiums adjust quickly. That’s what we’re witnessing here. The current directional bias may stay in place. Short-term contracts and options will likely factor in further downside risk until confidence is restored—whether through alignment in Parliament or new fiscal proposals. We need to remain flexible and ready to adapt. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now