British pound fell 0.06% against the US dollar (GBP/USD) to 1.25893 at around 11:00 a.m. GMT.
However, the pound was able to record more gains today against the euro, with a loss of 0.23%, and the Euro/GBP pair reaching the level of 0.85535 earlier this morning, which represents the lowest levels in three months, before the pair returned to the rise again to the level of 0.85699.
The pound’s movements today come with more uncertainty about the health of the British economy and the housing sector in particular, in addition to the recovery of British gilt yields after they reached their lowest levels for seven months.
Today we witnessed the publication of the Financial Stability Report, which presented a contrasting view from members of the Financial Policy Committee (FPC) at the Bank of England (BoE) about the health of the British economy across its various sectors.
While the report emphasized the strength of the banking system, which stated that it has sufficient capital strength to face the tight credit environment and companies in light of high interest rates, it also emphasized the weaknesses that do not appear to be heading for improvement soon with regard to the housing sector. With the increasing burden of servicing mortgage debt on individuals with extremely high rates.
The report indicated that the mortgage servicing burden will continue to increase until the year 2026, with the ratio of spending on debt servicing to post-tax income expected to reach 9%, compared to 6.8% in the second quarter of this year.
Policy makers also indicated in the report that current interest rates may take a long time to take effect in reducing inflation. However, the remaining upside risks of inflation, along with the gloomy outlook on the future growth of the global economy and the surrounding geopolitical risks, which in turn may lead to raising commodity prices, may all constitute pressure factors on the health of the economy.
In general, members of the FPC members did not hide their concerns about the housing market and the ability of individuals to cope with high mortgage rates.
Today’s Financial Stability Report comes as a continuation of a previous series of data, which also indicated continued weakness in the real estate market as a whole, with a larger than expected contraction for the third consecutive month in construction activities during last November.
The Construction PMI recorded a reading of 45.5, which was below expectations of 46.7, according to the S&P Global / CIPS report for last November. While the report indicated further extensions of the real estate market crisis as well.
The decline in activities was came with a decline in residential construction, with the rise in the cost of borrowing coinciding with the decline in demand for housing.
The decline in demand for housing has also contributed to pushing construction raw material prices to their lowest levels in 14 years, in addition to the poor performance of employment, which declined for the first time in ten months, and civil engineering activities, which declined to their lowest level since the middle of last year.
The decline in gilt yields also put more pressure on the pound today, which seems to reflect optimism that the BoE will cut interest rates sometime next year, coinciding with the gloomy outlook on the future of growth. Ten-year British gilts yield fell to 4.005%, which represents the lowest levels since last May.
Also, the yield gap between ten-year US Treasury bonds and their British counterpart is rising today to the highest level in a week, despite the worst anticipation for more data that may enhance expectations that the Federal Reserve will finish raising interest rates.