Economic uncertainty weighs on Sterling and Yen, driven by fiscal and political concerns
In the financial world, concerns over rising debt burdens and budget deficits have re-emerged, leading to a sell-off of long-dated government bonds in Europe and the United States. This development has sparked worries about the control of debt and deficits, with the UK government emphasising a cautious approach to reducing the budget deficit after the Autumn 2023 economic review.
Economists are calling for significant cuts in public spending to avoid the risks of high borrowing costs and a possible IMF-style bailout, similar to the 1970s. Finance Minister Rachel Reeves faces pressure to balance measures, including avoiding excessive tax increases that might trigger financial instability.
The sell-off in bonds has had a direct impact on currency markets. On Wednesday, investor concerns over global fiscal health led to a strain on the pound and the yen. The euro edged 0.1% lower to $1.1630, while the yen was weaker, down 0.2% at 148.62 per dollar after a 0.8% slide the day before. Sterling slipped more than 1% on Tuesday and traded 0.12% lower at $1.3378 on Wednesday.
Meanwhile, in the United States, the two-year U.S. Treasury yield eased slightly to 3.6495%, and the 30-year yield hovered just below 5%. These figures are expected to help guide Federal Reserve policymakers on the likelihood of a rate cut later this month.
Political uncertainty in Japan, including the possibility of Prime Minister Ishiba resigning, is another factor weighing on the yen. Hiroshi Moriyama, secretary general of the ruling party and close aide to Prime Minister Shigeru Ishiba, announced his resignation, which could affect Ishiba's position. Sanae Takaichi, among the frontrunners to succeed Ishiba, is widely seen as favouring ultra-low domestic interest rates, further pressuring the yen.
In Australia, the Australian dollar slipped 0.1% to $0.6514. The New Zealand dollar was 0.14% lower at $0.5857.
Traders are closely watching this week's series of U.S. labour market data releases, which could provide insights into the health of the world's largest economy. The upcoming autumn statement in the UK is a source of concern for markets, as they are worried about the government's ability to tackle the deficit and rapid build-up of debt.
Ray Attrill, head of FX research at National Australia Bank, stated that the current situation is a Europe-wide issue, but the UK is particularly affected due to the memory of the Liz Truss episode.
The broader global surge in long-dated bond yields continues, with markets remaining vigilant for any signs of economic instability or political shifts that could impact debt and deficit management.
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