Pound Sterling Watching US Bond Market Closely Ahead Of Key Inflation Data

European currencies were able to make headway against the dollar on Monday despite higher US yields.

The Pound to Dollar (GBP/USD) exchange rate, for example, advanced to around 1.2660, but will find it difficult to make further headway ahead of key US data.

The dollar tends to strengthen when US yields move higher, but this has not been the case since the middle of last week.

Ray Attrill, head of FX strategy at National Australia Bank, commented “It’s been a few days now, where we’re seeing an increasing disconnect between what’s happening in U.S. Treasuries, in particular an ongoing new year-to-date highs in Treasury yields, but the dollar is failing to respond to that.”

He pointed to evidence of an improving global economy and strength in commodity prices, together with fresh record highs for gold, which could explain this breakdown and demand for European currencies.

The yen, however, has lost some ground given the strong interest in currencies with USD/JPY close to the important 152.0 level and very close to 24-year highs.

The US bond market and yields will be a key short-term influence as the dollar is likely to be resilient if yields increase further.

In this context, there is an increased risk that the Japanese Finance Ministry will intervene through the Bank of Japan to support the yen.

If there is intervention, there will be at least a wider temporary dollar setback which would help support GBP/USD.

There are no major US data releases due on Tuesday, although the latest NFIB small-business confidence index will be potentially significant.

Last month’s releases recorded a notable dip in demand for labour and this element will be monitored closely this time.

The prices component will also be potentially important.

Overall, there will be a significant element of caution ahead of Wednesday’s US consumer prices data which should also curb dollar selling.

The Reserve Bank of New Zealand (RBNZ) will announce its latest interest rate decision on Wednesday local time. Consensus forecasts are for interest rates to be held at 5.50%.

Assuming rates are held steady, overall forward guidance from the bank will be pivotal for the currency.

Investment banks have backed away from forecasting further potential rate hikes, especially with the economy in a technical recession, but banks also expect that the RBNZ will push against market expectations of an early cut in rates.

The New Zealand dollar will retreat sharply if the RBNZ is more dovish.