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Investing.com -- The British pound experienced a difficult Tuesday as 30-year gilt yields reached their highest level since 1998, but the reaction may be overblown according to ING on Wednesday.
Despite the pound’s weakness, analysts noted that the long-dated bond selloff was occurring across Europe, with U.K. gilts performing similarly to their European counterparts.
The 0.7% rise in EUR/GBP demonstrated the pound’s sensitivity to yield movements, though ING maintains a conservative outlook, suggesting sterling is unlikely to decline much further based solely on gilt movements.
While rising back-end yields have drawn attention amid scrutiny of the U.K.’s fiscal situation, ING attributes much of the increase to higher inflation expectations and hawkish repricing of Bank of England rate expectations rather than fiscal concerns.
The banking group pointed to strong demand at a recent 10-year gilt auction, which raised a record £14 billion, contradicting the narrative that fiscal worries are the primary driver behind rising yields. Demand for extra-long-dated debt has been weak across developed markets generally.
ING remains cautious on the pound’s prospects, expecting the Bank of England to cut rates by year-end.
However, the bank believes current gilt market movements don’t appear dysfunctional and don’t justify a persistent risk premium on sterling, particularly given the U.K. government’s likely fiscal consolidation plans.
ING suggests EUR/GBP should remain below 0.870.