If European bond markets are going to sell off further, life may become even harder for UK Chancellor Rachel Reeves, ING’s FX analysts Chris Turner notes.

GBP/USD can't hold any near-term gains over the 1.26 area

"Remember she is going to provide a spending update on 26 March and needs to credibly argue how the government will hit its fiscal rule of a balanced budget in FY29/30. Higher gilt yields mean a higher bar for a credible spending plan and questions whether she can present a plan that defers spending cuts to the later years."

"If gilt yields are pressing their January highs at the time of the March review, this means either: a) the Chancellor will need to deliver deeper spending cuts or b) UK asset markets get hit should her plans not look credible."

"Neither scenario is a good look for Pound Sterling and that is why we doubt GBP/USD holds any near-term gains over the 1.26 area."