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Sterling edges up against dollar and euro

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Bond yields slip after surge on Wednesday

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Focus on UK fiscal outlook after failed welfare reform

By Johann M Cherian

July 3 (Reuters) - Sterling edged higher on Thursday,

stabilising after fiscal concerns and uncertainty about Rachel

Reeves' future as Britain's finance minister sparked a selloff

across UK assets in the previous session.

Markets had been monitoring developments around a welfare

bill in parliament where divisions within the Labour party

forced Prime Minister Keir Starmer to back down on large

spending cuts, leaving a hole in public finances.

The selloff gathered steam on fears that Reeves would be

replaced, but was contained as Starmer gave the finance minister

his full backing.

The government has been trying to stick to its self-imposed

fiscal rules to try to build investor confidence. However,

analysts warn that politically-difficult tax hikes might be

needed to balance public accounts and avoid extra borrowing.

"The immediate issue is that the government left a very

narrow margin in March against their fiscal rules they set

themselves," said a group of analysts led by Jim Reid at

Deutsche Bank.

"So unless we got a big burst of growth before the budget,

then the government would need to announce further tax rises or

spending cuts if they still want to meet the fiscal rules."

Sterling edged up 0.1% to $1.365 after sinking 0.8%

in the previous session - its biggest daily drop in more than

two weeks. The currency also firmed 0.3% against the euro

, which last fetched 86.3 pence.

The relief was also visible in bond markets, where the yield

on the 10-year gilt dropped 9 basis points. Yields

had spiked on Wednesday, with those on the benchmark note at one

point registering their largest one-day jump since October 2022.

Higher yields would generally support the domestic currency,

so Wednesday's reaction highlighted investors' pessimism.

Global investors have been grappling with ballooning public

debt in developed markets and have also been demanding greater

premiums to hold them. Yields on British bonds are among the

highest in the developed world.

Wednesday's plunge in British assets immediately drew

comparisons with Liz Truss' short-lived premiership in 2022,

which was derailed by a bond market selloff.

Traders expect the Bank of England to cut interest rates by

25 basis points again in September, according to data compiled

by LSEG.

All eyes will now be on a pivotal U.S. jobs report later in

the day that could help gauge the Federal Reserve's monetary

policy trajectory.