British Pound drops as US Dollar strengthens on rising US yields, higher oil prices

The British Pound (GBP) experienced a decline as the US Dollar (USD) strengthened, driven by rising bond yields and soaring oil prices. This development resulted in GBP/USD trading around 1.3510 during Asian hours on Wednesday. The US 10-year Treasury yield reached 4.80%, its highest level since early 2025, amid a global bond selloff.

Increased hostilities between the United States and Iran led to a surge in crude oil prices, raising concerns over potential energy supply disruptions from the Middle East. Strategists at Brown Brothers Harriman noted that the rising yields were not solely due to fiscal concerns but rather due to the relative outperformance of US 10-year Treasuries compared to other major bond markets.

However, they emphasized that this outperformance could leave the USD more vulnerable to fiscal stress.

The Federal Reserve's (Fed) stance on inflation and interest rates remained hawkish, with a slightly more aggressive tone from Fed Chair Jerome Powell, as indicated by a Fed Sentiment Index score of 128.86. This score suggests that the Fed is confident in moderating inflation despite stable labor market conditions and solid economic growth.

However, a lack of progress in controlling inflation could still prompt rate hikes. US economic data presented a mixed picture, with job openings rising but slightly below forecasts, and the ISM Manufacturing PMI easing to 54.6 in August from 55.6. The Bank of England (BoE) in the UK is expected to tighten interest rates by roughly 32 basis points by year-end, with an almost 70% probability of a November rate hike and an 80% chance of a follow-up hike in February.

This tightening sentiment is supported by UK shop-price inflation accelerating to a two-year high, as reported by the British Retail Consortium.