The British Pound slides again as UK government bonds sell off

GBP/USD slides again under 1.3200, its lowest since late June, as UK bonds sell off.
UK 30-year gilt yield above 6% for the first time since 1998.
Up to four BoE rate hikes priced by next summer.

Britain's 30-year gilt yield went above 6% on Thursday for the first time since 1998, and GBP/USD fell to its lowest since late June. Bank of England (BoE) external member Mann said in a speech the same day that UK financial conditions aren't tight enough. The pair is on track for a third straight weekly loss, trading just under 1.3200.

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By Mann's reading, a 6% gilt yield is inflation risk, not tight money

Mann said the rise in UK market borrowing costs since the US-Iran war began reflects investors expecting more inflation, and possibly a premium for uncertainty over BoE policy. Neither makes money tighter once inflation is counted, so she argued the BoE has to raise the UK's Bank Rate from 3.75% to keep its credibility. Markets already price as many as four increases by next summer.

Ten-year gilt yields reached their highest since July 2007 on Thursday, two days after the government sold new 10-year debt at the highest yield for that maturity since 1999. Chancellor Healey presents his first budget later in October.

Higher gilt yields haven't helped GBP/USD, because investors who expect more inflation sell the bonds and the currency together. Mann traced part of the uncertainty to the BoE's response to the war in March, which she said investors read as a central bank waiting, and the BoE has held at every meeting since.

US payrolls on Friday, then Mann again on Tuesday

Nothing from the UK is scheduled on Friday, so the event for GBP/USD is US Nonfarm Payrolls (NFP) at 12:30 GMT, forecast at 90K after 162K in August. Unemployment is forecast at 4.1%, and average hourly earnings at 3.2% YoY from 3.1%. Mann speaks again on Tuesday at 08:40 GMT.

A strong count could hit GBP/USD twice, through the Dollar and through gilts, which rose on Thursday after US Treasury yields did. Fed Chair Warsh has dropped the practice of signalling the next move in advance, which leaves a jobs report as the nearest thing to a signal before the October 28 decision.

The Pound's levels and lean

Resistance: 1.3250 capped Thursday's bounce from the first leg lower. No daily close has come above 1.3300 since the September 23 drop, though Wednesday's high went just through it.

Support: Thursday's low, just under 1.3200, is the lowest since late June. 1.3150, near the late-June lows, comes next, then 1.3100.

Bias: The lean is short while 1.3250 caps on a closing basis, with 1.3150 the first objective and 1.3100 the second. The daily Stochastic Relative Strength Index (Stoch RSI) is near 9 and has been below 20 for about three weeks, so a bounce toward 1.3250 may come first without changing the call. A daily close above 1.3300 ends it.

GBP/USD daily chart

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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