British Pound Crash: Are Fiscal Fears Triggering a Mini-Crisis?

Modified: Wednesday, 3 September 2025 09:30 BST - Written by Frank Davies

STORY LINK British Pound Crash: Are Fiscal Fears Triggering a Mini-Crisis?

The Pound Sterling slumped on Tuesday, tumbling to three-week lows against both the euro and the US dollar as UK bond markets came under heavy pressure.

Surging gilt yields reignited fiscal fears, with investors warning of a potential re-run of January’s mini-crisis.

The Pound to Euro (GBP/EUR) slid below the key €1.15 handle, while the Pound to Dollar (GBP/USD) plunged through $1.34 in one of its sharpest daily declines in months.

GBP/USD Forecasts - Slides to 3-Week Lows

The Pound secured a firm tone on Monday, but the currency has slumped on Tuesday amid a slide in UK bond markets and a fresh injection of fear.

Traders will be fearing a re-run of the mini-crisis from January.

The Pound to Euro (GBP/EUR) exchange rate dipped sharply to 3-week lows just below the 1.1500 level before stabilising while the Pound to Dollar (GBP/USD) exchange rate has slumped to 3-week lows below 1.3400 after trading at 1.3550 in Asia and threatening the sharpest 1-day decline since June.

The UK 10-year bond yield has jumped to 4-month highs at 4.80% while the 30-year bond has jumped to 5.68%, the highest reading since 1998.

Wider stresses have also been very notable with bond yields increasing in the US and Euro-Zone.

Equities have lost ground while gold has hit a fresh record high. The dollar has also gained significant net support.

Deutsche Bank’s Jim Reid commented on fiscal fears; “Even in orderly markets, we’re seeing a slow-moving vicious circle: rising debt concerns push yields higher, worsening debt dynamics, which in turn push yields higher again.”

On Monday, Prime Minister Starmer reshuffled his staff with former chief Secretary to the Treasury Darren Jones taking on a new role as chief Secretary to the Prime Minister while former Bank of England Deputy Governor Shafik was appointed as Starmer’s chief economic adviser.

Jefferies International chief economist Mohit Kumar commented; “The recent economic reshuffle in the government did little to ease investor concerns and is seen as undermining Chancellor Reeves.”

He added; “Tax rises are inevitable, but we are reaching a stage where further tax rises could become counterproductive. So far the government has shied away from difficult decisions on spending cuts which would be required to bring the fiscal picture back in order.”

Kathleen Brooks of XTB also noted underlying pressures; “This summer’s drip feed of potential tax rises has not gone over well with voters, and Labour has been haemorrhaging support to Reform in recent weeks. Essentially voters don’t want tax rises, while Labour backbenchers don’t want spending cuts, but something will have to give.”

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TAGS: Pound Dollar Forecasts Pound Euro Forecasts