The British pound continued its decline into early 2025, slipping to $1.2342, its lowest level since April 2024.

Sterling’s tumble came despite a surge in gilt yields to their highest levels in decades, which failed to offset the pound’s weakness against a dominant U.S. dollar. Analysts point to global economic pressures, including robust U.S. data that have solidified expectations for prolonged high U.S. interest rates, strengthening the dollar. Meanwhile, the UK's stagnant growth, persistent inflation, and escalating government borrowing costs—highlighted by 10-year bond yields hitting 4.78%, the highest since October 2008—have intensified concerns about fiscal sustainability and limited sterling's appeal. A weaker inflation outlook has further dampened confidence in the pound, as investors see fewer incentives to hold UK assets, especially as further modest cuts in the base rate by the Bank of England are anticipated.

Sterling tumbles for a second day against firmer dollar, even as gilt yields rise | Reuters

1. What factors have been affecting the price of Sterling in early 2025?

2. Why might higher long-term interest rates (bond yields) be expected to boost the £’s value?

3. Why are economists concerned that bond yields have been rising?