Investor concern hits the Pound again

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waterman
Written by Dan Waterman
May 21st 2025
Economic discomfort is weighing on the Pound today..

Economists knew the UK headline inflation reading was going to jump last month, but it was a bit too much for some traders who have turned on the Pound. Bond yields have risen after the result today, meaning the cost of government borrowing has once again gone up and this is because of stagflation concerns. 

3.5% was the inflation result (3.3% was expected) up from a 2.6% reading in March. The more important core inflation figure also superseded (3.8% v 3.6% and 3.4% prior) and the services number was most surprising coming in at 5.4% from 4.8% expected and 4.7% previous.

What does this mean for you and the Pound?

Higher prices on everything again unfortunately and for the rest of the year at that. In terms of the Pound, a higher inflation number was expected and priced into GBP's value. However, even though money markets have now slashed the interest cut path for 2025 after today (only one more cut expected), which usually means a stronger currency as 'higher rates for longer', the Pound has instead fallen.

This is because the concern is inflation will now go higher than anticipated, interest rates won't be raised in response and so everything now lies on the economy outperforming, which is looking rather unlikely at this point. Therefore stagflation fears have grown (much worse than a recession).

Still, GBP v EUR trades only at a 1-week low and therefore remains favourable and in more positive news, GBP v USD is now trading at a 3-year high!

The US is seeing a deterioration in USD demand overall and foreign participants in the US treasury market is declining. US debt is out of control and completely unsustainable. Current debt to GDP is the highest since WWII at 100% and is expected to climb to 125% in 10-years time.

The Euro is the clear winner today, this week and so far this year. €-$ is now up a crazy 10% this year, as a reallocation of global and domestic investor funds continue to pour out of the US and into Europe.