The GBP/USD pair extended its decline to around 1.3625 during Asian trading on Thursday, influenced by selling pressure on British government bonds. Key economic data from the US, including Nonfarm Payrolls, Unemployment Rate, and Average Hourly Earnings, are anticipated later in the day.

UK government bonds experienced their largest selloff since October 2022 following decisions to cut benefits, causing concerns about the finance minister’s future. The UK’s debt position has become a focal point, potentially applying further selling pressure on the currency pair.

Rising Uk Bond Yields

On Wednesday, GBP/USD fell below 1.3600, driven by rising UK bond yields, although some recovery attempts were seen. UK Prime Minister Keir Starmer’s inability to implement welfare cuts has led to economic instability, with potential tax hikes further unsettling the market.

Amid political strife, the Pound fell sharply, dropping over 1% or 170 pips against the US Dollar. Unrest within the Labour Party resulted in the removal of a clause from the welfare reform plan, negating £5 billion in anticipated savings by 2030. This political turmoil has significantly influenced market movements.

The recent decline in the Pound against the Dollar reflects more than just short-term sentiment shifts—it’s a by-product of tightening domestic conditions and political shocks tied directly to fiscal credibility. What began as a reaction to rising bond yields has turned into something more layered. By the time the pair neared 1.3625 in Thursday’s trade, much of the damage had already been done, though we saw brief moments of stabilisation. That minimal bounce was more a reflex than a change of direction.

The selloff in UK gilts, the sharpest since late 2022, wasn’t driven solely by external rate expectations. It came on the heels of a government decision to walk back benefit reforms, wiping out several billion in projected budget savings. Investors are now reassessing the fiscal path, and with that comes pressure on long-term debt, filtered through to exchange rates. To ignore those dynamics is to overlook the direct pipeline between fiscal credibility and currency resilience.

Fiscal Policy Impact

Reeves’s strained position adds more steam to the bond volatility. Traders interpreted the reduced welfare cuts not as compassionate policy, but as a hole blown in the budget. The loss of those expected savings bumped up expectations that tax hikes will appear on the agenda. This is where positioning turned aggressive—gilts sold off, and the Pound slipped more than 1% in just one session.

Whether this turns into a longer downward channel depends not just on US jobs data, but on how Westminster’s policy direction develops. The clause removal from the proposal—pressured by internal pushback within the ruling party—makes it harder to win back the market’s vote of confidence. No one buying and selling UK assets is ignoring the internal fractures that contributed to this retreat in the pair.

We see this more as a repositioning phase than a temporary dip. Unless something shifts materially on the fiscal messaging front, the path for Sterling looks weighted to the downside. Economic announcements from Washington are, of course, relevant—every payroll release or wage number adds to speculation about future Fed moves—but Sterling weakness has its roots at home this week.

Expect short-term volatility spikes around US data releases. However, support levels on cable may be tested again if UK fixed income markets remain unstable. We are monitoring liquidity in the front end of the curve closely. If gilts stay offered, the Pound may continue to struggle to find dependable buyers. Any rallies near the 1.3650 zone may fade quickly in this context, especially if domestic uncertainty deepens further.

It’s not just about rates—perceived political cohesion matters too. Starmer’s loss of control over the reform narrative unsettled fixed income desks across London. And when yields spike not because of policy normalisation, but due to worries about fiscal discipline, currency risk premiums respond rapidly. That’s what we’re seeing here.

Directional bias may stay intact for now. Short-term contracts and options are likely to price in additional downside risk until reassurance arrives—either through parliamentary alignment or new fiscal proposals. We need to remain agile.

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