Pound hits fresh 14-month low, 'surge in UK borrowing costs to hit growth'
Surge in UK gilt yields likely to weigh heavily on economic growth, warn economists at Goldman Sachs
By Aysu Bicer
LONDON (AA) - The British pound has fallen to its lowest level in 14 months, dropping by a cent to $1.22, following the release of unexpectedly strong US jobs data.
This marks the pound’s weakest performance since Nov. 2023, as the US economy continues to outpace expectations.
According to the US Bureau of Labor Statistics, non-farm payrolls surged by 256,000 in December, significantly exceeding economists’ forecasts of a 160,000 increase.
The robust job growth also pushed the US unemployment rate down to 4.1%. Gains were recorded across key sectors, including health care, government, social assistance, and retail.
The labor market's strength is a positive development for the US economy, giving President-elect Donald Trump a solid foundation as he prepares to take office later this month.
However, it also presents a challenge for the Federal Reserve, which may find it difficult to justify cuts to interest rates amid such robust economic performance.
Analysts have raised concerns about the ripple effects on the UK economy, particularly in light of the ongoing sell-off in UK government bonds.
Economists at Goldman Sachs have warned that the surge in UK gilt yields is likely to weigh heavily on economic growth.
Yields on 10-year gilts have climbed by 24 basis points to 4.81% since the start of the year and by nearly 100 basis points since September, reaching their highest level since 2008.
James Moberly and Sven Jari Stehn, analysts at Goldman Sachs, cautioned that higher borrowing costs would pose significant challenges for households and businesses.
"Gilts have sold off materially... We expect higher yields to act as an additional headwind to growth via household remortgaging and weaker investment, with the increase of the last few days worth around 0.1 percentage points of additional growth drag this year," they noted.
Meanwhile, Liberal Democrat leader Ed Davey has voiced sharp criticism over the timing of Chancellor Rachel Reeves’ trip to China, accusing the government of neglecting urgent economic issues at home.
In a strongly worded statement, Davey said the UK was “flying blind” with both the chancellor and the Bank of England governor, Andrew Bailey, abroad. He called for immediate action to address the ongoing market instability.
“The ongoing crisis in the markets needs the Chancellor’s urgent attention, and for her to be on the other side of the world is deeply worrying,” said Davey. “Our economy is flying blind with the Chancellor and Bank of England governor abroad.”
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