GBP: Once again, the narrative of the UK as a developing country – Commerzbank

On Tuesday, there were several reports once again claiming that the United Kingdom was a developing country. This was due to gilt yields rising significantly and the pound coming under considerable pressure. Typically, this combination of events — a sell-off of domestic government bonds and a weakening currency — occurs in developing countries when market participants lose confidence in domestic public finances, Commerzbank's FX analyst Michael Pfister notes.

Oongoing budget negotiations appear to be difficult

"In principle, this is understandable. In recent days and weeks, there has been a lot of negative news about the British budget situation, which is justifiable. The British Chancellor of the Exchequer is walking a tightrope. Revenues are falling due to the weakening real economy, while expenditure continues to rise due to high inflation. In the United Kingdom, the government has made the additional election promise that it will strive for a balanced budget, with all daily expenditure to be covered by revenue. The ongoing negotiations appear to be difficult. Yesterday, the autumn budget announcement was scheduled for late November, which is unusually late in the year."

"Despite all the justified criticism of the British budget situation, something bothers me: Tuesday's events were by no means limited to the United Kingdom. Bond yields rose worldwide due to concerns about fiscal stability (France being a key example), and most currencies depreciated except for the US dollar. The situation was somewhat more pronounced in the UK, where the Treasury issued a new gilt via syndicate and the market is already more concerned about the fiscal situation. However, this was by no means an isolated case. More interestingly, the US dollar appreciated significantly, despite US Treasuries suffering similarly to gilts. But is the US dollar the only currency of an industrialised country? I hardly think so."