Sterling Suffers Worst Day Since June as UK Gilts Sell Off and Fiscal Fears Escalate

Sterling Plunges on Market Turmoil

The British pound suffered its steepest fall since June on Tuesday, hammered by a sharp sell-off in UK gilts that reignited investor concerns over the country’s fragile fiscal outlook. Sterling slid 1.4% against the U.S. dollar, breaking through key technical levels and triggering heavy selling across European trading desks.

The move coincided with a spike in gilt yields, with 10-year borrowing costs hitting 4.95% and 30-year yields climbing above 5.65%, the highest levels in decades.

Fiscal Stability Back in Spotlight

The sell-off underscores deepening anxiety about Britain’s fiscal position ahead of the government’s autumn Budget. Analysts warn that elevated borrowing costs threaten to crowd out public investment, complicate debt servicing, and leave little room for the ruling Labour government to deliver campaign promises.

“The gilt market is sending a clear message: fiscal credibility is at risk,” one London strategist noted. “Investors are demanding a higher premium to hold UK debt.”

Sterling’s Worst Day Since June

The currency reaction was swift and brutal. Sterling endured its worst single-day decline since June, falling below $1.23 against the dollar and tumbling against the euro. The scale of the drop revived memories of last year’s market turbulence, when gilts sold off following controversial fiscal policies.

Traders highlighted that the pound is becoming increasingly sensitive to bond market moves, making fiscal policy a central driver of currency sentiment.

Broader Market Ripples

Equities

London’s FTSE 100 initially gained on the weaker pound but later slipped as banking and real estate stocks fell under pressure from higher yields.

Bonds

The gilt rout rattled eurozone bond markets, with Italian and Spanish yields also edging higher, reflecting regional contagion risk.

Global FX

The dollar strengthened broadly as safe-haven demand rose, while the yen and Swiss franc also advanced modestly.

What’s Driving the Gilt Sell-Off?

Several factors converged to drive the sharp move:

1. Rising borrowing costs – UK debt servicing is expected to rise by £20 billion annually if yields remain elevated.
2. Pre-Budget jitters – Markets fear the upcoming fiscal plan could lean too heavily on borrowing.
3. Global backdrop – U.S. Treasury yields remain elevated, amplifying selling pressure in UK debt.

The result has been a perfect storm, reviving fears of a repeat of the 2022 gilt crisis that forced the Bank of England into emergency interventions.

Analysts’ Take

Market strategists remain divided on whether the sell-off marks the start of a prolonged crisis or a temporary adjustment.

“Sterling’s sharp fall is a warning shot,” said a London-based FX trader. “If fiscal policy doesn’t reassure, investors could push the pound much lower.”

Others believe the sell-off reflects global rate dynamics more than UK-specific risks, noting that U.S. Treasuries also face intense pressure.

The Road Ahead

Attention now shifts to the autumn Budget. Investors will scrutinize spending plans and debt projections to gauge whether the Labour government can restore credibility. Any signs of fiscal slippage could deepen the sell-off in gilts and send sterling even lower.

At the same time, the Bank of England faces a dilemma: supporting growth risks weakening the pound further, while tightening policy into fiscal headwinds could tip the economy into recession.

The Bottom Line

Sterling suffered its worst day since June as UK gilts sold off sharply, exposing deep concerns about Britain’s fiscal trajectory. With borrowing costs at multi-decade highs and credibility on the line, the coming weeks will be pivotal in determining whether this is a passing storm, or the start of a broader market reckoning.