Pound's Slump Against Euro Highlights Diverging Bond Yields

The British pound plummeted to a four-month low against the euro on Friday, impacted by a contrasting trend in bond yields. While British gilt yields fell slightly amid soft data, European bond yields rose with signals that the ECB has concluded its rate cuts. The euro surged as high as 87.27 pence, nearing its April 11 high point during tariff-induced market chaos.

Amid economic headwinds, the pound also tumbled 0.4% against the dollar, valued at $1.3456. This downturn followed an underwhelming retail sales report for June and job cuts occurring at a pace not seen in five months. Derek Halpenny of MUFG noted that the focus for the Bank of England remains on the labor market, which influences their cautious stance on rate cuts.

This careful approach contrasts with the European Central Bank, which has reduced rates by 200 basis points recently, compared to the BoE's 100 bps. Market expectations still anticipate further BoE cuts should inflation, currently at its peak in a year, begin to slow. Yet, the BoE faces a complex balancing act as pressures from inflation continue to loom.

(With inputs from agencies.)