The British pound struggled on Tuesday as 30-year gilt yields hit their highest level since 1998. However, ING said on Wednesday that the market reaction looks exaggerated.
Analysts pointed out that the selloff in long-dated bonds is not limited to the UK. Similar moves are being seen across Europe, suggesting gilts are performing in line with their peers.
Sterling’s weakness was reflected in a 0.7% rise in EUR/GBP, highlighting the pound’s sensitivity to yield shifts. Even so, ING expects limited downside for sterling, noting that gilt moves alone are unlikely to drive a deeper fall.
Much of the rise in long-term yields stems from higher inflation expectations and a hawkish repricing of Bank of England rate cuts. ING stressed this is more influential than concerns about UK fiscal stability.
Supporting this view, demand for a recent 10-year gilt auction reached a record £14 billion, showing that fiscal worries are not the primary factor. Weak demand for ultra-long bonds has been a broader trend across global markets.
Looking ahead, ING remains cautious on the pound. The bank forecasts a Bank of England rate cut by the end of the year. Yet, it believes current gilt market shifts are not dysfunctional and do not justify a lasting risk premium on sterling.
Overall, ING expects EUR/GBP to stay below 0.870, supported by likely UK fiscal consolidation.
