UK: ‘Doom Loop’ or Something Else?

“Britain is stuck in a “doom loop” of rising debts, higher taxes and slower growth, one of the world’s most influential hedge fund managers has warned. 

American billionaire Ray Dalio has issued a stark warning about the health of the UK economy….”

Source: Daily Telegraph, 28^th July 2025, “Hedge fund boss issues stark warning to Britain”, https://www.telegraph.co.uk/business/2025/07/28/britain-stuck-in-doom-loop-warns-hedge-fund-chief/

The UK’s government bond market is increasingly exposed to the risk of sharp price swings and sudden sell-offs, the International Monetary Fund has warned,

Source: Business Matters, 28^th May 2025, “IMF warns UK government debt market is vulnerable to sudden shocks”,

https://bmmagazine.co.uk/news/imf-warns-uk-government-debt-market-is-vulnerable-to-sudden-shocks/

Judging by the headlines, all is lost in the UK! Influential hedge fund managers are talking about Britain’s ‘doom loop’ (see above); the IMF is warning of a bond market rout (2^nd quote); while according to The Spectator magazine: “Britain is heading for economic catastrophe” (published 8^th July 2025).

With that backdrop, one would imagine that UK assets are struggling, and volatility is elevated.

Despite all those concerns, though, the FTSE100 is trading at an all time high (over 9,000); the FTSE250 (the midcap index) surpassed its 2024 highs earlier this month; while the currency has been strong (YTD) and the GILT market has been behaving in an orderly manner. Indeed, while the headlines are screaming about UK 30 year GILT yields trading at multi decade highs, the reality is that the dramatic part of the back-up in yields was in 2022 (with the movement since then much steadier and slower – fig 3).

Furthermore, despite all the scaremongering*, speculators are net LONG GBP (fig 2), while the currency continues to behave in an orderly manner, as demonstrated by its strong correlation with our market timing scoring system (for GBPUSD) – fig 1. This model aggregates GBP speculative positioning, sentiment and our technical scoring system. As the chart shows, it has generated (reasonably) effective BUY and SELL signals over the timeframe shown (albeit it was early/wrong in late 2021). That, in and of itself, suggests that markets aren’t overly panicked by the ‘doom-laden’ UK headlines. Reinforcing that message, GBP’s implied 3m currency volatility (versus the USD) is running close to year to date lows.

If correct, and that sentiment continues, then trading GBPUSD using the model (fig 1) is likely to remain an effective strategy (at least for now) – i.e. further GBP downside is expected in the near term.