Pound slips as global bond selloff lifts dollar, with gilt yields at 2008 high

Sterling slipped on Tuesday, September 1, as investors returning from a long holiday weekend faced a global bond selloff that pushed British borrowing costs to their highest since 2008 and strengthened the dollar. The pound dipped 0.07% to 1.35395 against the US currency, weighed down by renewed U.S.-Iran hostilities that revived inflation concerns and by hawkish remarks from Federal Reserve Chair Jerome Powell on Friday, which raised expectations of a U.S. rate increase.

Dollar strength and fiscal worries hit sterling

A stronger dollar has pushed sterling about 1% below the six-month high of $1.36745 hit late last month. Investors are now watching parliament's return this week for clues on how new Prime Minister Andy Burnham will fund his plans ahead of the October budget.

Britain's strained public finances remain a key concern, with gilt yields among the highest in the developed world and markets sensitive to any change in the fiscal outlook. The 10-year gilt yield rose to its highest since June 2008 at 5.2554%, as oil prices topped $92 a barrel.

Bank of England holds its stance

The Bank of England is widely expected to leave interest rates unchanged at 3.75% this month, though markets continue to price in a quarter-point increase by the end of the year. Governor Andrew Bailey said on Friday he saw little evidence that the recent jump in energy prices was generating lasting inflation pressures.

"The Bank of England is uncertain how transitory the price shock will be," said Commerzbank FX analyst Michael Pfister.

Mixed data and consumer pressures

British retailers raised prices by the most in more than two years last month, as higher energy prices pushed up the cost of some processed food and the AI boom raised the cost of consumer electronics, data showed on Monday.

Economic data on Tuesday painted a mixed picture. Manufacturing activity in August expanded at its slowest pace since March, while Bank of England data showed lenders approved the fewest mortgages in July since January 2024. The economy remains resilient, however, with GDP rising 0.3% in the latest month and 0.4% over the latest three-month period.

For Nigerian businesses and importers dealing in pounds, the weaker sterling against the dollar could offer slight relief on UK-denominated transactions, but the broader strength of the dollar keeps pressure on the naira and raises the cost of dollar-based imports.