The flash crash overnight was only the half of it. Even taking the bounce back from the lows (whatever they were) into account, the currency is now a thumping 2.7 per cent lower today, trading at just $1.2275 against the dollar. It’s also 1.8 per cent lower against the euro, at €1.11. Gilts are recoiling in response.
This suggests that investors are shifting away from the view that the overnight slump can be written off as a technical blunder. (More on that here.)
Yields on the UK’s 10-year benchmark bond are now up by some 0.084 percentage points to 0.951 per cent, having briefly poked above 0.98 per cent. (Yields rise when prices fall, and prices fall when investors are worried about inflation and/or currency risk.)
Seamus Mac Gorain, portfolio manager at JP Morgan Asset Management notes:
The rise in gilt yields has been triggered by the sharp fall in sterling, which will lead to higher UK inflation, and so has contributed to a significant rise in UK breakevens. In addition, the UK is set to shift to an easier fiscal stance in next month’s Autumn Statement, while the fall in sterling and stronger UK data have reduced the likelihood of further easing from the Bank of England in the near term.
Charts from Bloomberg