UK Market Selloff Deepens as Pound Plummets to Yearly Low

The UK market is in the throes of a deepening selloff, with the pound falling to its lowest level in over a year. The British Pound (GBP) has been on a downward trajectory, losing nearly 1% on Wednesday and extending its slide on Thursday to touch its lowest level since November 2023 below 1.2250. The pair remains vulnerable despite turning technically oversold in the near term.



The broad-based US Dollar (USD) strength and a bout of selloff in British government bonds triggered a sharp decline in GBP/USD. The yield on the 10-year UK gilt climbed to its highest level in over 16 years and the yield on the 30-year reached its strongest level since 1998 early Thursday. Assessing the latest developments in the UK gilt market, "this is a global move but it's being led by the UK," said RBC Capital Markets' fixed income strategist Megum Muhic.



On the downside, static support seems to have formed at 1.2250 ahead of 1.2200 (static level, round level) and 1.2140 (static level from November 2023). Looking north, first resistance could be spotted at 1.2350 (former support, static level) before 1.2400 (round level, mid-point of the descending channel).

The pound's weakness and the surge in gilt yields are likely to have significant implications for the UK government's fiscal plans. The rise in borrowing costs will make it more expensive for the government to finance its debt, putting additional strain on the public finances. This could lead to a reduction in the government's fiscal headroom, which is the amount by which the government's borrowing is below the target set by the Office for Budget Responsibility (OBR).



Moreover, the rise in gilt yields and the weakness of the pound are likely to reduce the government's fiscal space, which is the amount by which the government's borrowing is below the target set by the OBR. This could limit the government's ability to implement its fiscal plans, such as increasing public spending or cutting taxes. The rise in gilt yields and the weakness of the pound are also likely to put upward pressure on inflation, which could erode the real value of the government's debt and reduce the government's fiscal headroom. This could also lead to a reduction in the government's fiscal space.

In conclusion, the UK market selloff and the pound's depreciation are likely to have significant implications for the UK government's fiscal plans. The rise in gilt yields and the weakness of the pound are likely to make it more expensive for the government to finance its debt, reduce the government's fiscal space, and put upward pressure on inflation. The government will need to carefully manage its fiscal policy to mitigate these risks and maintain the stability of the UK economy.