GBP/CAD falls to a four-week low due to the British bond crisis while Canadian PMI improves

The British pound (GBP) is under strong selling pressure this Tuesday, with the GBP/CAD pair plummeting sharply amid concerns over the UK's fiscal trajectory and the surge in Gilt yields.

Currently, GBP/CAD is trading around 1.8460, close to its lowest level since August 7, after decisively falling below the psychological threshold of 1.8500 during the European session. This movement reflects a widespread weakness of the pound, with GBP/USD also dropping to near four-week lows amid a strong sell-off of British government bonds.

The crisis in the gilts has raised 30-year yields to approximately 5.72%, their highest level since 1998, highlighting investors' concerns about rising borrowing costs and the fiscal credibility of the Labour government ahead of the autumn budget. This increase in long-term borrowing costs adds pressure to the already fragile British economic outlook, raising doubts about the sustainability of the debt.

Meanwhile, the record British issuance of 14 billion pounds in 10-year Gilts attracted strong demand, with over 140 billion in bids. However, the bonds were settled with a yield of 4.8786%, the highest since 2008, highlighting the elevated “risk premium” that investors now demand for holding debt in pounds sterling. Analysts warn that although the demand for British paper remains deep, the cost of financing is rising to levels that could constrain fiscal flexibility.

On the Canadian side, the latest S&P Global Manufacturing Purchasing Managers' Index (PMI) provided some support for the Canadian dollar. The index rose to 48.3 in August, up from 46.1 in July, marking the best reading in four months. Although it remains below the neutral threshold of 50, the improvement highlights that the contraction in manufacturing activity is easing.

However, it was the seventh consecutive month of decline in the Canadian manufacturing sector, pressured by the series of tariffs imposed by the United States on Canadian products along with domestic retaliations, which have weighed on demand and trade flows.

Commenting on the data, Paul Smith, Director of Economics at S&P Global Market Intelligence, noted that the sector “continued to decline, but to a significantly lesser degree than at the beginning of the year,” adding that although conditions remain challenging, the figures for August suggest a tentative stabilization in activity.