- Having failed again to rally above 1.4000, GBP/USD has dropped back towards 1.3900 as the US dollar strengthens.
- USD is being driven higher by surging US bond yields, while the result latest BoE rate decision was largely ignored.
GBP/USD was unable to eclipse the 1.4000 level (which roughly coincides with the highs so far this month) and has since dropped all the way back to the 1.3900 level, meaning Wednesday’s post-dovish FOMC monetary policy decision gains are now all but gone. The move is being driven by a broad strengthening of the US dollar, which is being boosted as US bond yields advance, with GBP an average performer on the day in the context of the G10 performance table (GBP sits close to the middle of the rankings).
On the day, GBP/USD trades about 0.3% or roughly 45 pips lower. With the pair having now rejected the 1.4000 level for the fifth time so far this month, bears will be targeting a move back to the bottom of this month’s range in the low 1.3800s. This area, which also coincides with GBP/USD’s 50-day moving average, ought to offer pretty robust resistance.
Driving the day
As noted, surging US government bond yields are the primary factor pushing GBP/USD lower on Thursday; nominal US 10-year yields have surged more than 11bps on the day to above 1.75%, fresh cycle highs, with the bulk of the move being driven by a sharp rise in real yields (10-year TIPS yields are up nearly 9bps on the day to well above -0.6%). The increase in UK government bond yields, while also large, is smaller than the move in US markets, with the nominal UK 10-year yield up roughly 6bps on the day – this means the US/UK rate advantage has widened, which is bearish for GBP/USD.
The Bank of England’s rate decision (full recap below) does not appear to have had a lasting impact on sterling, while mixed US data (there was a huge beat on expectations in the latest Philly Fed survey for the month of March, but Weekly Jobless Claims data was not as good as expected) has not had a meaningful impact on the market’s broader appetite for risk, which remains fragile amid the bond market rout. Elsewhere, a record 582K vaccine doses were administered in the UK on Wednesday, according to the latest tally, and an official from the UK’s MHRA was on the wires vouching for the safety of the AstraZeneca vaccine (if a link between the vaccine and thrombo-embolic events was established, this would merely require an update on vaccine guidance rather than prompting a pause in the rollout).
Bank of England Recap
As expected, the Bank of England held interest rates at 0.1% and the bank’s QE programme was maintained at a total of £895B, with the Committee maintaining its commitment to completing another £150B in asset purchases by around the end of 2021.
In the monetary policy statement, the BoE maintained that the current policy stance is appropriate, noted that news of plans to reopen the economy is consistent with a slightly stronger economic outlook, but reiterated that it does not intend to tighten policy until there is clear evidence that significant progress is being made towards eliminating spare capacity and sustainably achieving its 2.0% inflation target.
The BoE’s minutes, released at the same time as the statement and monetary policy decision, show what Capital Economics thinks is a significant difference of opinion amongst MPC members with regards to different weightings on the balance of risks around the outlook for the UK economy.
Capital Economics’ UK inflation forecast suggests the BoE probably won’t think about reversing its QE programme or raising interest rates until 2023 at the earliest. As such, the economic consultancy thinks “markets have gone too far in expecting rate hikes from mid-2022″¦ We think that rates won’t rise above their current rate of +0.10% until 2026″¦ (and) as a result, we doubt the 10-year gilt yield will rise much above 1.00% over the next two years”.
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