EUR/GBP briefly traded to 0.8650 yesterday – a move which seems to coincide with the sell-off in UK gilts. That UK gilts even underperformed US Treasuries is quite remarkable and probably very unnerving for the UK's Debt Management Office, ING’s FX analyst Chris Turner notes.

GBP/USD can meet buyers near 1.2800

"One view here is that the DMO is already pushing the limits with £300bn of new issuance this year and that any greater slowdown in the UK economy, which would hit revenues/raise welfare spending, would only hit gilts harder. Clearly, then, the gilt market is an Achilles heel for sterling."

"The market now prices around three cuts for the Bank of England this year, with which we agree. We're a little reluctant to call EUR/GBP quickly back below 0.8500 since bond markets might struggle with another high US CPI reading today. GBP/USD could meet buyers near 1.2800 if our EUR/USD thesis holds today."

"Better news, however, has been coming from US Treasury auctions, where the 10 year went quite well yesterday and expectations are for a decent 30 year auction today."