GBP/USD Gains Mask Britain's Growing Fiscal and Gilt Risks

The pound sterling's recent gains against the US dollar may mask underlying fiscal and gilt risks in Britain, according to recent data. Sterling traded at 1.3605 on Wednesday, down 0.21% against the dollar, after breaking below the 1.3620 area that had floored the intra-week range.

The rally has been substantial, with sterling adding roughly four cents from its early-August base and sitting 2.8% above the recent low of 1.3165 printed on June 24. However, almost none of this rally was earned in Britain, as the Bank of England has been on hold since July, and the domestic calendar between now and then is effectively empty.

The absence of domestic catalysts is not a footnote to this rally, it's the rally itself. Every pip of the August move was priced somewhere else, specifically in a dollar being sold on the suspicion that the government issuing it would rather manage the yield curve than let it clear.

Britain has the same disease worse, with ten-year gilt yields sitting at 4.99%, the highest in the G7 and roughly a third of a percentage point above the American paper being dumped over debt sustainability. The pound has been winning a debasement trade without anyone checking what Britain pays to borrow.