GBP

Sterling fell heavily against both the euro and dollar on Friday as UK government bond yields declined, hinting that the market is paring back its expectations for future Bank of England interest rate rises.

The UK’s ten-year government bond yields fell 5.0% on July 1st and was back to levels seen on May 31st. Falling bond yields signal increasing investor expectations for an economic recession amid surging inflation.

The bet is that the BoE won’t raise interest rates as far as markets were originally thinking, as the central bank tries to balance the need to control inflation with falling economic activity. Analysts predict Sterling could fall lower based on a number of reasons. Firstly the UK’s trade deficit is widening, this is down to the rise in energy prices and Brexit continuing to weigh on the country’s imports and exports. Secondly a dovish stance from the BoE will put further pressure on the pound, but upside could be a possibility if the bank hints at aggressive tightening of monetary policy. Additionally, increasing taxes will have a crippling effect on the economy. Lastly with the unemployment rate increasing and GDP declining, upside for Sterling remains capped and further losses are likely.