GBP rallies to key levelsAs demand for UK bonds jumpSentiment aided by better-than-expected UK dataAnd Supreme Court ruling on Scottish independence

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Demand for UK government bonds has helped pull the British Pound materially higher over recent hours and with the remainder of the week being a quiet one owing to the U.S. Thanksgiving holiday, gains might stick.

The Pound rallied sharply against the Euro, Dollar and other major currencies through Wednesday and into Thursday amidst a sharp pick up in the value of UK government debt.

The value of ten-year government gilts rose above 110.39 amidst increased demand, pushing the yield they pay. investors below 3.0%, meaning the cost of borrowing in the UK is in the process of falling.

The below chart shows the rising value of a ten-year bond has correlated with a rise in the value of the Pound:

Above: GB ten-year bonds (top) and GBP/USD (bottom). Consider setting a free FX rate alert here to better time your payment requirements.

The rise in bond values and the corresponding fall in their yields was replicated across other time tenors in the bond market, meaning the cost of funding mortgages and other financial products in the UK has eased.

The Pound to Euro exchange rate reached a 24-hour peak at 1.1644 and is at 1.1587 on Thursday, taking euro payment rates at the typical bank to around 1.1354 and those at competitive payment providers to around 1.1550.

The Pound to Dollar exchange rate reached a 24-hour peak at 1.2113 and is at 1.2093 at the time of writing, taking dollar payment rates at a typical bank to around 1.1850 and those at competitive payment specialists to around 1.2057.

Falling bond yields represent an easing in UK financial conditions, which supports future economic activity.

Bond yields surged in the wake of former Prime Minister Liz Truss' September mini-budget as investors demanded greater compensation (yield) for holding UK bonds.

These investors judged that the proposed unfunded tax cuts would require more borrowing, at a time when the cost of borrowing on international markets is rising.

In order to invest in UK bonds, investors demanded greater compensation from the government, in the form of higher yields.

The resultant surge in bond yields meanwhile sent the cost of finance through the economy rocketing, risking a destabilisation of the UK financial sector and exacerbating the economic slowdown.

The Pound reflected this anxiety by dropping sharply.

The current retracement lower in bond yields is therefore supportive of the UK economic outlook and the Pound.

"A return to fiscal orthodoxy, reduced political risk premium and reduced risks of a housing market correction from a less amplified BoE policy cycle are also positive for the currency," says Paul Robson, head of FX research at NatWest Markets.

The Pound has rallied by 7.40% from its post-mini budget low that was reached on September 26, it has meanwhile advanced 16.50% since this point.

"After a volatile few months following a year of underperformance, the tide may be turning for the better for GBP. Structural weaknesses will not completely turn around overnight, but the risks are much better priced at these levels of FX and rates," says Paul Mackel, head of FX research at HSBC.

In their latest year-ahead outlook, HSBC says it is forecasting a rebound in the Pound during 2023.

(If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

There were some key domestic factors that facilitated improved sentiment towards UK assets midweek.

UK data came in better than expected, with PMIs for November revealing that the slowdown in UK economic activity has settled.

The country is in recession, but this is well-priced by markets, meaning that there is now a greater propensity for upside surprises relative to downside surprises.

In short, the Pound is therefore likely to be more reactive to good news than bad.

The Supreme Court meanwhile ruled Scotland's government could not hold an independence referendum without the consent of the UK government.

This punts the risk of a breakup of the Union into the long grass, easing another potential flashpoint for investors.

"The Supreme Court’s ruling today against a Scottish independence referendum is also likely to have helped the pound," says Charles Purdy, CEO of Smart Currency Exchange.