British Pound tests 1.3200 as higher US yields and risk-off markets boost US Dollar

The British Pound (GBP) experienced a decline against the US Dollar (USD) on Wednesday, reaching three-month lows just below 1.3200 prior to the opening of the US trading session. Dismal market sentiment, coupled with soaring oil prices and surging US Treasury yields, contributed to the strengthening of the US Dollar. Meanwhile, soft UK manufacturing activity data failed to bolster the Pound.

US Treasury yields climbed higher on Thursday, with the 10-year note reaching a 24-year peak above 5.30%, while the 30-year yield hit a multi-decade high of 5.68%. In contrast, the 2-year yield remained steady around 4.90%, reflecting expectations of a delayed rate hike from the Federal Reserve (Fed). On Wednesday, the US Personal Consumption Expenditures (PCE) Price Index data indicated that inflationary pressures grew less than anticipated in August, while the July figure was revised downward.

Consequently, market expectations for another rate increase in October dropped to 37%, down from nearly 70% a week prior, according to CME’s FedWatch Tool. In the UK, the revised S&P Global Purchasing Managers’ Index for September showed a slight decline to 51.9, down from the initial estimate of 52.0. The report highlighted the weakest output growth in six months, with orders and exports expanding moderately but demand slowing due to higher energy prices.

Rabobank analysts noted that speculative positioning on the Pound had worsened significantly, with GBP net shorts increasing by over 40% to their highest level since August. The deterioration in speculative sentiment towards the Pound aligned with the recent oil-driven USD rally, underscoring the negative perception of the British currency.