– Written by
David Woodsmith
STORY LINK Pound-to-Dollar Outlook: Bond-Market Reversal Sends GBP Above 1.36
The Pound to Dollar (GBP/USD) exchange rate surged through the 1.3600 level on Wednesday as a sharp reversal in US bond yields triggered renewed selling pressure on the Dollar.
GBP/USD traded around 1.3606 during the evening session, up more than 0.5% on the day and above the previous August high around 1.3570.
The move came after the US Treasury announced plans to double its buybacks of longer-dated government debt, easing some of the intense pressure that had pushed long-term Treasury yields to multi-year highs earlier in the week.
The 30-year US yield dropped close to 10 basis points following the announcement, while the 10-year yield also moved sharply lower.
The change in bond-market conditions provided a major boost to Sterling and other major currencies against the Dollar.
GBP/USD Forecasts: Break through 1.36 Resistance
Tuesday’s global bond sell-off had threatened to undermine risk appetite and trigger renewed pressure on the Pound.
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US 30-year Treasury yields had climbed above 5.32%, the highest level since 2007, while UK long-term yields were also close to multi-decade highs.
The subsequent reversal in US yields transformed the short-term market backdrop.
UoB had commented ahead of Wednesday’s move that “the upside bias in GBP remains intact, but any advance is expected to face firm resistance at 1.3600.”
That resistance has now been tested and breached.
Scotiabank had also maintained a constructive technical outlook; “Minor new highs for Cable above the July peak alongside solid underlying trend momentum point to GBP gains pushing on to retest the May high at 1.3660.”
The 1.3660 area therefore becomes the next important upside target if GBP/USD can maintain the break above 1.3600.
Rabobank remains more cautious over a three-month horizon and has a GBP/USD forecast of 1.33.
The Dollar came under widespread selling pressure after the US Treasury said it would increase buybacks of longer-dated government bonds.
The announcement was interpreted as an attempt to improve liquidity and stabilise the long end of the Treasury market following the recent sharp rise in yields.
US 30-year yields had reached their highest levels in 19 years on Tuesday amid concerns over inflation, fiscal policy, Middle East tensions and the huge capital requirements associated with artificial intelligence investment.
MUFG had commented; “What is directly fuelling this worsening of sentiment now is less clear but the worsening situation in the Middle East is likely a factor in intensifying concerns over inflation and concerns over the US fiscal position.”
The bank added that weak appetite for addressing the US fiscal outlook and unprecedented demand for capital to fund AI investment were also contributing to pressure on long-term yields.
Wednesday’s Treasury announcement helped calm those fears in the short term and pulled the Dollar index sharply lower.
The move also illustrated how sensitive currency markets remain to developments in global bond markets.
The latest UK inflation figures also provided little reason for markets to substantially alter their Bank of England expectations.
Headline consumer-price inflation increased to 2.9% in July from 2.6% in June, matching consensus forecasts.
Core inflation held at 2.6%, while services inflation eased to 3.4% from 3.6%.
The headline increase largely reflected the sharp rise in household energy bills following July’s increase in the Ofgem price cap.
The data produced little immediate Sterling reaction, with markets continuing to focus more heavily on global bond moves and the Dollar.
The Bank of England is still expected to leave rates unchanged in the near term, particularly after Tuesday’s labour-market report showed unemployment holding at 4.9% and private-sector wage growth slowing further.
Deutsche Bank chief UK economist Sanjay Raja had commented after the jobs figures; “Weakness in headline indicators should keep the MPC stuck on the sidelines for now.”
Near-Term GBP/USD Forecast: 1.3660 Now in Focus
The break above 1.3600 has strengthened the immediate GBP/USD technical picture.
The next major resistance area is around 1.3660, corresponding with the May highs highlighted by Scotiabank.
A sustained move above this region would open the door towards 1.3700 and potentially the January highs further above.
On the downside, 1.3570 should now provide initial support, followed by the 1.3500-1.3510 area.
Bond markets will remain crucial.
A renewed rise in long-term Treasury yields could restore Dollar support, particularly if driven by higher energy prices or stronger inflation expectations.
However if the Treasury’s expanded buyback programme succeeds in suppressing long-end yields and upcoming US data remains soft, the Dollar could face further losses and GBP/USD may extend its move towards the mid-1.36s.
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TAGS: Pound Dollar Forecasts
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