The British Pound Is Behaving Like a Developing Economy’s Currency
Yanko Hristov, Head of Institutional Sales and Business Development at Alaric Securities on “Business Start”
Broad sell-offs have persisted in UK markets for the fourth consecutive day, focusing attention on the pound, which has fallen to its lowest level in over a year. The currency’s movement followed a surge in British bond yields earlier this week to their highest levels since 2008. The speed of the decline drew comparisons with the fallout from Liz Truss’s ill-fated mini-budget in 2022 and the 1976 debt crisis, during which the UK sought IMF bailout assistance. This was the observation of Yanko Hristov, Head of Sales and Business Development at Alaric Securities (and former Vice President – Prime Brokerage of Barclays Investment Bank in London), during the program “Business Start,” hosted by Hristo Nikolov.
Concerns that the Labour government may fail to keep the deficit under control amidst higher borrowing costs pushed sterling down by as much as 1% on Thursday, to $1.2239—its weakest level since November 2023. Investors were frustrated by the government’s escalating debt burden and persistently high inflation over recent months. When the global sell-off accelerated this week, UK assets quickly took center stage.
“There is distrust in the UK economy driven by the budget deficit, which is significantly larger than that proposed by Liz Truss. Due to the budget and some decisions taken by Keir Starmer’s government and Chancellor Rachel Reeves, investors are demanding higher yields, leading to a sell-off in bonds. The pound is reacting similarly to how the currency of a developing economy would, rather than the sixth-largest economy in the world. There is a bond sell-off and rising yields, which should typically strengthen the currency, but this is not the case for the pound. Once again, the UK is entering a spiral similar to the one that cost Liz Truss her position, making her the shortest-serving British Prime Minister with 49 days in office,” Hristov explained.
The market is signaling the government to tighten spending, and the next steps depend on measures taken by the government and the Bank of England (BoE). In 2022, the BoE introduced a £65 billion bond-buying program to protect the country’s pension funds, which hold substantial quantities of bonds.
“It now comes down to the relationship between the BoE and the government, which I don’t think is in great shape at the moment,” Hristov noted.
Investors are losing confidence, but the clouds over the British economy began gathering as early as 2016, with the Brexit referendum, Hristov stated. The consequences of severing ties with London’s largest trading partner took time to manifest, and now there is uncertainty about relations with the US under a potential Donald Trump return.
Beyond trade issues, the UK is also experiencing a severe labor shortage, which is highly detrimental to a service-based economy.
At the same time, Prime Minister Keir Starmer is already beginning to lose some of his support, Hristov added.
“I wouldn’t call it a political and economic crisis just yet, but unfortunately, that’s the direction things are heading. The forecasts for the UK’s development and growth relative to the debt they aim to raise are grim. Combined with relations with the EU and US, it leads me to think that tough days lie ahead for Starmer.”
How the crisis is exacerbated by UK pension funds, the impact of global market volatility, and Federal Reserve interest rates can be viewed in the video.
Source: BloombergTV Bulgaria