Global bond markets came under pressure in European session, led by a sharp selloff in long-dated UK gilts. Yield on UK 30-year surged past 5.65% to its highest in 27 years, breaking above the peak set in April. Investors are increasingly concerned that Prime Minister Keir Starmer’s government may abandon fiscal discipline ahead of the upcoming Budget.
French bonds also came under strain, with the 30-year yield climbing to its highest since 2009 as Prime Minister François Bayrou scrambles to shore up parliamentary support ahead of next week’s confidence vote. U.S. Treasury yields are climbing in tandem, with the 30-year approaching 5%—a level last seen in July.
The catalyst in the UK was Starmer’s reshuffle of his Downing Street team, including the appointment of Darren Jones as chief secretary to the Treasury to manage delivery of priorities. The changes, intended to strengthen economic governance ahead of the Budget, have instead rattled markets, with traders worried about a lack of coherent strategy to revive growth while borrowing continues to swell.
Adding to the unease, speculation has resurfaced that Chancellor Rachel Reeves could be sidelined. Markets have been sensitive to such risks before—when questions arose over Reeves’ position in July, gilt yields spiked on fears she might be replaced by a more left-leaning figure less committed to fiscal prudence. The latest political maneuvering has revived those anxieties.
The immediate market reaction suggests little confidence in the government’s direction. Investors are interpreting the moves as paving the way for more gilt issuance, higher inflation, and weaker commitment to fiscal rules. Expectations are building that the Budget could lean heavily on borrowing to fund spending promises rather than tax hikes, amplifying the pressure on long-dated debt.
In currency markets, Sterling has been the weakest performer of the day, weighed down by fiscal and political concerns. Yen and New Kiwi followed on the downside, while Ddollar rebounded on support from rising Treasury yields. Loonie and Swiss Franc also gained, while Euro and Aussie traded mid-pack.
In Europe at the time of writing, FTSE is down -0.60%. DAX is down -1.57%. CAC is down -0.31%. UK 10-year yield is up 0.077 at 4.831. Germany 10-year yield is up 0.044 at 2.794. Earlier in Asia, Nikkei rose 0.29%. Hong Kong HSI fell -0.47%. China Shanghai SSE fell -0.45%. Singapore Strait Times rose 0.52%. Japan 10-year JBG yield fell -0.019 to 1.606.
ECB’s Schnabel sees no need for more easing, eyes higher inflation risks
ECB Executive Board member Isabel Schnabel pushed back against further monetary easing, telling Reuters that policy maybe already “mildly accommodative” and that she sees no case for another rate cut at present. She noted that the economy has held up better than expected, underpinned by robust domestic demand and bolstered by a “significant fiscal impulse” from Germany’s investment plans in infrastructure and defense.
Schnabel also argued that global tariffs imposed by the Trump administration are likely “on net inflationary”, even without EU retaliation. “If you have an increase in input prices globally due to tariffs, and these propagate through global production networks, this will increase inflationary pressures everywhere,” she said.
Schnabel also dismissed concerns that a stronger Euro might weigh heavily on price dynamics. She said currency appreciation tied to improving Eurozone growth prospects would have a more limited pass-through, adding, “I am less concerned about exchange rate developments.” She stressed that she sees little chance of inflation expectations de-anchoring to the downside after years of price overshoots.
Looking forward, Schnabel warned that a more fragmented world with tighter supply chains, higher fiscal spending, and aging populations is structurally inflationary. In such an environment, she argued, “central banks around the world start to hike interest rates again may come earlier than many people currently think.”
Eurozone CPI ticks up to 2.1%, core stays 2.3%
Eurozone headline inflation inched higher in August, with the flash CPI rising to 2.1% yoy from 2.0% yoy, in line with expectations. The increase came largely from a slower drag in energy prices, though food and services inflation moderated slightly from July levels.
Core CPI, excluding food, energy, alcohol, and tobacco, remained unchanged at 2.3% yoy, defying expectations of a slight dip to 2.2% yoy. The measure has now held steady since May.
By component, food, alcohol and tobacco continued to drive the highest annual inflation rate at 3.2%, followed by services at 3.1%. Non-energy industrial goods stayed muted at 0.8%, while energy prices fell -1.9% from a year earlier. The data suggest inflation continues to stabilize near the ECB’s 2% target.
BoJ’s Himino: Risk of larger-than-expected tariff impact warrants focus
BoJ Deputy Governor Ryozo Himino warned in a speech today that U.S. trade policies are likely to weigh on Japan’s economy, with overseas slowdowns and weaker corporate profits feeding through domestically. While accommodative financial conditions should cushion the hit, Himino said the baseline scenario is for Japan’s growth to “moderate,” with downside risks from tariffs deserving greater attention.
Looking further ahead, Himino said Japan’s growth should eventually recover as overseas economies return to a more stable expansion path. But in the near term, the tariff shock remains the key uncertainty, with the risk of a “larger-than-expected impact” now seen as more pressing than the chance of a mild outcome.
On inflation, Himino noted that headline prices remain above the BoJ’s 2% target, by a “considerable margin”, due in part to surging rice prices and spillovers to other goods. However, he stressed headline inflation is expected to “decline in due course” as food-related effects fade. Underlying inflation, meanwhile, remains below target but is steadily rising, despite some potential “temporary halts”, supported by a wage–price feedback loop.
Summing up, Himino said the BoJ’s baseline scenario assumes headline inflation will cool, while core prices continue to edge toward 2%. If that path holds, it would be appropriate for the central bank to keep raising rates gradually, fine-tuning monetary accommodation in line with improving economic activity and stable price gains.
EUR/GBP Mid-Day Outlook
Daily Pivots: (S1) 0.8632; (P) 0.8652; (R1) 0.8665; More…
EUR/GBP’s strong rally today solidifies the case that corrective pattern from 0.8752 has completed at 0.8595. Intraday bias is back on the upside for retesting 0.8752. Firm break there will resume whole rally from 0.8221. Next target is 0.8867 fibonacci level. For now, further rise is expected as long as 0.8636 support holds, in case of retreat.
In the bigger picture, the structure from 0.8221 medium term bottom are not impulsive enough to suggest that it’s reversing the down trend from 0.9267 (2022 high). But even if it’s a correction, further rise could still be seen to 61.8% retracement of 0.9267 to 0.8221 at 0.8867. Nevertheless, sustained trading below 55 W EMA (now at 0.8513) will argue that the pattern has completed and bring retest of 0.8221 low.
