The pound was under pressure on Friday, falling back below $1.40, as traders turned to safer assets such as the dollar amid a sell-off across global markets.
Sterling slipped to $1.3946 against the dollar (GBPUSD=X), down from the three-year highs of $1.42 seen earlier in the week, while it dipped half a eurocent against the euro (GBPEUR=X) to €1.1474. The currency hit a high of €1.17 during the week.
It came after a sharp spike in bond yields in the last 24 hours, with investors adopting a risk-off approach.
Jim Reid at Deutsche Bank said: “Yesterday proved to be nothing short of a rout in global markets, with the selloff in sovereign bonds accelerating as investors looked forward to the prospect of a strengthening economy over the coming months.
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“Matters weren’t helped either by stronger-than-expected economic data, which only added to the fears that the Fed could withdraw stimulus sooner than anticipated, and helped Treasury yields see their biggest daily rise since March."
Markets were hedging the risk of an earlier rate hike from the Federal Reserve, despite officials vowing earlier in the week that any move was long in the future.
Chairman Jay Powell, vice-chair Richard Clarida, and permanent Fed governor Lael Brainard said that higher rates were “a natural consequence of an economic recovery story”, and that they have no intention of raising rates imminently.
Other currencies also came under pressure during the bond sell-off.
“Rising yields in the US, European and Japanese debt markets have sharply reduced risk assets’ attractiveness, Alex Kuptsikevich, senior market analyst at FxPro, said.
“Currencies and emerging markets were hit especially hard yesterday. Currencies such as the Mexican peso, South African rand and Turkish lira lost more than 3% intraday.”
There were also early signs of a tightening of financial conditions in Europe on Thursday, with sharp rises in government borrowing costs.
Philip Lane, chief economist at the European Central Bank (ECB) said it is prepared to buy bonds flexibly in order to prevent a fiscal tightening.
Michael Hewson of CMC Markets said: “The problem the ECB has is that the bond market doesn’t appear to be listening, and even if they were, there is some doubt that the ECB would be able to do anything about any rise in yields.”
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