Sterling was on track for its largest three-day decline in almost two years on Thursday, pressured by a global bond sell-off that has particularly affected gilts, pushing yields to their highest levels in 16 and a half years amid growing concerns about the UK's financial situation.

The Pound declined by 0.9% to $1.226 at the time of writing, after hitting its lowest point since November 2023 earlier in the day. It was heading for a third consecutive daily loss, totalling a 2% drop over this period, the steepest decline since February 2023.

Against the Euro, the Pound fell 0.6%, reaching a two-month low of 83.93 pence, Reuters reports.

Concerns over rising inflation, diminished expectations for interest rate cuts, uncertainty about how the incoming US administration under President-elect Donald Trump will approach foreign and economic policy, and the potential for trillions of Dollars in additional debt issuance have caused bond yields to surge globally this week. 

The UK market has been the hardest hit among major economies. Benchmark 10-year gilt yields have risen by a quarter of a percentage point this week alone, reaching their highest level since 2008, as confidence in the UK's fiscal outlook weakens.

Typically, higher gilt yields would strengthen the Pound, but at the moment, this correlation has broken down, reflecting investors' growing concerns about the country's financial situation.

“With Sterling weakening, that meant growing questions were asked about whether the Bank of England could cut rates as fast as expected,” according to Deutsche Bank strategist Jim Reid.

“So collectively, this rise in yields is adding to the risk that the government will breach their fiscal rules and have to announce further consolidation (tax rises and/or spending cuts), whilst the weaker currency will add to inflationary pressures at the same time.”

In a statement on Wednesday, the UK Treasury emphasised that its commitment to the British government's fiscal rules was non-negotiable.

Sterling has been one of the top-performing currencies against the Dollar in recent years, primarily due to the Bank of England's policy of maintaining higher interest rates for a longer period compared to other major central banks, providing an incentive for foreign investors to earn returns from UK assets.

Whereas Donald Trump's proposed policies on trade tariffs and immigration carry the potential to increase US price pressures, which could limit the Federal Reserve's ability to lower interest rates. This has led to the Dollar surging against nearly all other currencies.