Fears of UK Recession Push Sterling and Gilt Yields Down – Germany Warned of ‘Sick Man of Europe’ Status
The UK’s mounting fears of a recession caused a sharp decrease in sterling and gilt yields, as investors scaled back their bets on where interest rates will peak.
As central bankers gathered at Jackson Hole in Wyoming, US for their annual conference, a series of gloomy reports highlighted the sharp decline in private sector activity in both the UK and the Eurozone. Inflation and rising borrowing costs were identified as the main culprits.
This negative news prompted a swift reassessment of interest rate outlooks, with investors now anticipating that rates in the UK may not reach the previously predicted peak of 6%. Since December 2021, rates have already been raised from 0.1% to 5.25%.
The pound fell more than a cent against the dollar to as low as $1.2616 and was down half a cent against the euro to €1.1676
The value of the pound dropped more than a cent against the dollar, hitting a low of $1.2616, and decreased by half a cent against the euro, reaching €1.1676.
Government borrowing costs also declined in the bond markets, with the yield on two-year gilts falling below 5%, after reaching 5.5% last month. The ten-year gilt yield, which hit a 15-year high of 4.75% last week, dropped below 4.5%. ING economist James Smith referred to these movements as a “significant repricing of UK rate expectations” and predicted that the Bank of England will only raise rates by 0.25% to 5.5% next month.
S&P Global reported that its barometer of activity among UK private sector firms, with the cut-off point for growth at 50, fell into contraction territory. The Purchasing Managers’ Index (PMI) decreased from 50.8 in July to 47.9 in August
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