Sterling made some big losses overnight in response to a sell-off in global stock markets.
Rising government bond yields globally (particularly US treasuries) have contributed heavily to this move, signalling investors are fearful inflation could spike if the global economy overheats as economies strengthen and recover following the pandemic. This could force central banks to withdraw stimulus sooner than expected by exiting their generous quantitative easing programmes and raising interest rates earlier than they’re indicating.
This has created a heavy risk-off sentiment which the pound is particularly vulnerable to. Furthermore, the large gains Sterling had made this week had pushed it into overbought territory and therefore vulnerable to a correction and profit-taking.
As a result, the pound has given up the gains it’s made this week and we’ve seen the biggest 24-hr decline in the pound in 2021. The GBP/USD is down around 2.5 cents from yesterday’s high and back under 1.40 (at an 8-day low). The GBP/EUR is down around 1.3% from yesterday’s high and nearly 2-cents off this week’s high (a 9-day low).
Markets will be keeping a close eye on the central banks to see if they will try and calm the bond markets down. The tantrum in the bond market is damaging central bank credibility and, as much as they will not want to cause alarm by intervening, they might need to if the rout continues.