Currency Market Analysis


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Feb 26, 2021 | Currency Market Analysis

Global Themes

Sterling slides sharply as bond market bites

• GBP/USD bounces off highs to test weekly lows
• Surge in yields boosts USD

GBP/USD

GBP/USD bounces off highs to test weekly lows

Recent GBP/USD gains have been predicated on upbeat UK growth views based on Britain's rapid vaccine rollout, easing lockdown and fading Brexit anxieties. Yesterday’s upbeat Eurozone data inhibited sterling gains and the recent testimony by Federal Reserve (Fed) Chair Jerome Powell highlighted a lengthy outlook for steady near-zero rates that initially renewed downward pressure on the dollar, to the pound's benefit.

However, rising US Treasury yields Thursday picked up momentum following a poor US 7-year treasury note auction which in turn provided a sharp boost for the USD. This demand dropped GBP/USD down to $1.40, extending the corrective pullback away from $1.4182 and GBP/USD hit $1.3925. This move in GBP/USD then prompted a sharp fall in GBP/EUR. US Treasury yields remain key now with month-end flows that will also be relevant today, however, with moves in equity markets that signal might not be as strong.

• A light UK data calendar today. Bank Of England’s Monetary Policy Committee members are speaking at 10am and 12:30pm.

USD

Surge in yields boosts USD

A rally in US bond yields overnight has lifted the US Dollar against all currencies. US treasuries have become a focal point for traders with money markets looking to price in possible monetary tightening despite the Fed’s dovish comments earlier this week.

The rise in yields and the dollar has seen commodity-linked and risk related currencies tumble as a result. Investors have become more and more confident in the global economic recovery but are becoming more concerned with whether central banks will be able to keep their word by maintaining a loose monetary stance. Inflation-linked risks are driving traders to switch to traditional safe-haven assets such as the US Dollar. Earlier this week money markets were betting that the Fed will hike interest rates next year, however, this sentiment has now shifted to see an even earlier move.

• The dollar has gained against all its peers with the dollar index close to regaining all the losses sustained this week. EUR/USD is back to its tight trading range with the pair trading around the mid $1.21 zone this morning. GBP/USD however is down 2.36% from this week’s high hovering above the $1.39 handle this morning. US consumption and core PCE for Jan will be released at 1:30, these indicators show the US spending and consumption by the average citizen giving a reflection of economic spending.

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