The Office for Budget Responsibility (OBR) hands the UK government a huge warning..
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| The last time GBP v EUR was below £-€1.10 mid-market was December 2020 and the last time the pair was above £-€1.20 was March 2025.
As things stand, it's my view we have a higher chance of seeing the former before the latter again..
Now i'm not saying GBP v EUR is about to lose 5% of its value. I'm simply saying with the current variables at play (mainly bonds, interest rates & economic growth), I can't see how £-€1.20 is achievable, but I can see how £-€1.10 is.
The OBR is the governments de facto financial watchdog and they released a damning report yesterday with a headline that read "The country is on course to have a debt-to-GDP ratio of 270% by 2070".
I guess this doesn't really matter to us all right now, but currently;
The UK has the 6th highest debt, 5th highest deficit and 3rd highest borrowing costs among the 36 advanced economies and all are getting worse faster than anyone else. Enter then government bonds..
What are bonds and why do they matter?
Liz Truss lost her job back in 2022 when she announced a fiscal plan (the infamous mini-budget) no-one saw coming which focused on tax cuts and deregulation. The same agenda as Trump's right now (or one of I should say).
The idea back then was to stimulate economic growth, but investors and traders were not ready for the dramatic change in policy and were equally in agreement it was not the right call for the country.
This saw a collapse in confidence in the UK government which saw bond yields dramatically rise and GBP to crash.
Governments issue bonds over fixed terms as a safe investment to consumers (often used in pension funds and during market volatility) and to raise money for public spending and in our case right now in the UK to service debt (it was originally introduced to service wars).
The higher the yield offered (the % return on investment), the higher the perceived risk is to consumers to buy, which means confidence wanes and the correlated currency falls.
Basically, to get people to give money to government when it needs it, the government have to make it attractive enough to the consumer so they buy (or print money which is for another time).
After a quiet couple of years, bonds have exploded in 2025 and been the main financial market driver of volatility on 3 different occasions already this year (including right now) at an average loss to GBP v EUR of 2% each time.
High UK bond yields is bad news for £.
Also, a large chunk of UK bonds are being bought by foreign investors (foreign capital inflow helps keep GBP stable) as yields are high. But should confidence in the UK government continue to fall over its fiscal plan and bond purchases drop, the Pound will collapse.
Instead of following Truss & Trump, rightly or wrongly, Reeves will be hiking taxes to service Government debt, a more familiar and certain road. But even this plan is causing bond yields to spike and this is a scary problem.
No-one it seems has the answer and at some point this will engulf GBP, the only questions are when and how bad will it be.. |
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