Traders are scaling back their expectations for interest rate reductions.

Traders are scaling back their expectations for the Bank of England to cut interest rates this year as markets react to the unusual scenario of a declining pound alongside rising government borrowing costs.

Money market data now suggests that policymakers are likely to implement only one Bank Rate cut this year, down from the two reductions anticipated earlier.

This shift occurs even as the pound weakens despite an increase in bond yields—a key indicator of government borrowing expenses. Rising bond yields typically support a currency by attracting investors to allocate their funds to that economy.

However, the pound has dropped to its lowest level since 2023, just as 30-year gilt yields have reached their highest point since 1998. This combination signals investors have lost confidence in the government’s ability to manage national debt and control inflation.

Today, Sterling fell below $1.23, having started the year above $1.25. Options traders are now betting that the currency could decline as far as $1.15.

Nevertheless, the pound’s current struggles are less severe than those in September 2022, when it plunged from nearly $1.17 to below $1.07 within a few weeks following Liz Truss’s mini-budget

FTSE 250 Reaches Eight-Month Low Amid Bond Market Sell-Off

The FTSE 250 has fallen to its lowest level in over eight months as retail stocks were severely impacted by disappointing Christmas trading results and a worsening bond market sell-off.

Today, the UK mid-cap index declined by 1.1%, hitting its lowest point since April, as stocks faced significant pressure from the sharp increase in British borrowing costs.

B&M plummeted 13.4%, sinking to the bottom of the FTSE 250 after it reduced the upper range of its annual profit forecast.

In the FTSE 100, Marks & Spencer was the worst performer, dropping by 6.3% amid warnings about rising costs and economic headwinds for the year. Tesco also slid by 1.5% after maintaining its full-year profit outlook.

Despite these declines, the FTSE 100 rose by 0.6%.