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Finance

Sterling ticks higher but heads for weekly loss after gilt turbulence

Published by Global Banking and Finance Review

Posted on September 5, 2025

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LONDON (Reuters) -The pound rose versus a broadly weaker dollar on Friday, but headed for its third weekly decline in a row after a week marked by gilt market turbulence amid growing investor jitters over Britain's finances.

At 1040 GMT on Friday, sterling was 0.3% higher at $1.3481, but on track for a weekly decline of 0.2%. The pound was flat against the euro, which held at 86.73 pence.

The dollar was weaker across the board as traders await key U.S. payrolls data due later which are expected to firm up the case for an interest rate cut by the Federal Reserve.

Sterling has been in focus this week, after British government bonds, known as gilts, sunk amid a broader bond market sell-off as focus shifted to rising debt levels in major economies.

Yields on 30-year British government bonds, or gilts, briefly shot up this week to their highest since 1998.

This week the date for the next UK budget was set for November 26, with finance minister Rachel Reeves under pressure to keep the government's finances on track.

In a note, Ruth Gregory, deputy chief UK economist at Capital Economics said many of the conditions which have led to fiscal crises in the past are now in place in the UK, but that this does not mean a fiscal crisis in the UK is imminent or inevitable.

"The missing ingredient is a trigger. If a UK fiscal crisis does erupt, it’s as likely to come from a change in perceptions or personnel as economic data or policy," she wrote.

"This underlines the need for the government to continue to commit to fiscal discipline to keep the bond market onside."

Official figures on Friday showed British retail sales volumes rose by a higher-than-expected 0.6% in July, leaving them up 1.1% on the year.

Economists polled by Reuters had forecast a 0.2% monthly rise in sales volumes and a 1.3% increase compared with a year earlier.

Francesco Pesole said while the figure was higher than expected, the previous month was also revised down, limiting any market impact, and it is also not what the market is focused on.

"It's very focused on inflation to gauge whether the Bank of England (BoE) views that inflation is actually a bit hot to keep cutting rates at the same pace," said Pesole.

Money markets are placing a 98% chance of a 25 basis point cut at the BoE's next meeting in September.

(Reporting by Lucy Raitano, Editing by Louise Heavens)