- GBP/USD adds to the recent recovery past the 1.3500 level.
- The US Dollar starts the week on the back foot, falling to multi-week lows.
- US markets are closed on Monday due to the Labor Day holiday.
The British Pound (GBP) is rapidly recovering from Friday’s hiccup and manages to regain composure on Monday, lifting GBP/USD past 1.3500, a figure in a context dominated by the widespread selling bias in the US Dollar (USD).
GBP/USD focuses on 1.3600
The resurgence of buying interest in Cable comes in response to extra weakness in the Greenback, which drags the US Dollar Index (DXY) to levels last seen in late July, below the 98.00 support.
Meanwhile, investors are expected to gear up for quite an interesting week on the US calendar, where the US labour market is expected to take centre stage amid steady speculation of a couple of interest rate cuts by the Federal Reserve in the latter part of the year.
In the United Kingdom (UK), investors largely anticipate the Bank of England (BoE) to leave its policy rate unchanged at its September 18 gathering, while implied rates suggest nearly 25 basis points of easing by March 2026.
In the meantime, market participants should maintain their watchful stance on the UK fiscal scenario, while Treasury Committee members will meet the BoE’s rate-setters later this week, hoping to pick up clues on when cuts might come or whether there could be tweaks to the bank’s quantitative tightening plans.
What’s on the UK calendar
Across the Channel, Nationwide Housing Prices contracted by 0.1% in August, Mortgage Approvals rose to 65.35K in July, and the BoE’s M4 Money Supply expanded by 0.1% in July from a month earlier. In addition, the final S&P Global Manufacturing PMI came in at 47.0 in August.
Technical landscape
If GBP/USD breaks above the August high at 1.3594 (August 14), it could clear the path toward the 2025 ceiling at 1.3788 (July 1). Beyond that, the next resistance is the October 2021 peak at 1.3834 (October 20).
On the flip side, first support comes in at the weekly low of 1.3390 (August 22), followed by the August floor at 1.3141 (August 1) and the May base at 1.3139 (May 12) just below.
UK gilt yields FAQs
UK Gilt Yields measure the annual return an investor can expect from holding UK government bonds, or Gilts. Like other bonds, Gilts pay interest to holders at regular intervals, the ‘coupon’, followed by the full value of the bond at maturity. The coupon is fixed but the Yield varies as it takes into account changes in the bond’s price. For example, a Gilt worth 100 Pounds Sterling might have a coupon of 5.0%. If the Gilt’s price were to fall to 98 Pounds, the coupon would still be 5.0%, but the Gilt Yield would rise to 5.102% to reflect the decline in price.
Many factors influence Gilt yields, but the main ones are interest rates, the strength of the British economy, the liquidity of the bond market and the value of the Pound Sterling. Rising inflation will generally weaken Gilt prices and lead to higher Gilt yields because Gilts are long-term investments susceptible to inflation, which erodes their value. Higher interest rates impact existing Gilt yields because newly-issued Gilts will carry a higher, more attractive coupon. Liquidity can be a risk when there is a lack of buyers or sellers due to panic or preference for riskier assets.
Probably the most important factor influencing the level of Gilt yields is interest rates. These are set by the Bank of England (BoE) to ensure price stability. Higher interest rates will raise yields and lower the price of Gilts because new Gilts issued will bear a higher, more attractive coupon, reducing demand for older Gilts, which will see a corresponding decline in price.
Inflation is a key factor affecting Gilt yields as it impacts the value of the principal received by the holder at the end of the term, as well as the relative value of the repayments. Higher inflation deteriorates the value of Gilts over time, reflected in a higher yield (lower price). The opposite is true of lower inflation. In rare cases of deflation, a Gilt may rise in price – represented by a negative yield.
Foreign holders of Gilts are exposed to exchange-rate risk since Gilts are denominated in Pound Sterling. If the currency strengthens investors will realize a higher return and vice versa if it weakens. In addition, Gilt yields are highly correlated to the Pound Sterling. This is because yields are a reflection of interest rates and interest rate expectations, a key driver of Pound Sterling. Higher interest rates, raise the coupon on newly-issued Gilts, attracting more global investors. Since they are priced in Pounds, this increases demand for Pound Sterling.
