GBP/USD and other risk-sensitive assets rose at the start of the new week, as concerns over a widespread market contagion from indebted property developer China Evergrande Group began to subside.
Last Thursday the Sterling surged 0.8% against the dollar after a rather hawkish tone by the Bank of England on interest rates and after two policy makers called for an immediate halt to the GBP 895 billion bond buying programme.
“A first rate step in Q1 is now priced in by financial markets which is likely to provide support for sterling for now,” Commerzbank analyst Esther Reichelt wrote in an investor note.
“To be quite clear: we consider the current GBP strength to be justified, but continued challenges for economic growth such as the labour shortages that have been aggravated by Brexit are likely to prevent a rapid tightening of monetary policy,” Reichelt added.
Yet, the currency pair trimmed that gain on Friday and retreated 0.46% for the week.
Meanwhile, against a basket of six major peers, the US Dollar was holding not far from last week’s one-month high of 93.524 on Monday.
The yield on 10-year US government bonds surged to the highest level since July 2nd at 1.4660% earlier on Monday on expectations of monetary policy tightening by the Federal Reserve. The central bank said last week that it might begin tapering asset purchases as soon as November and indicated rate hikes might follow sooner than expected.
“USD is likely to remain caught in the cross-currents of a more hawkish FOMC and fading concerns around a potential Evergrande default,” Commonwealth Bank of Australia analysts wrote in a note to clients.
“Nevertheless, the risks are skewed to a firmer USD,” they added.
This week’s focus will be on central bank speakers, with Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen expected to speak before the US Senate Committee on Banking, Housing and Urban Affairs on Tuesday.
As of 8:52 GMT on Monday GBP/USD was edging up 0.31% to trade at 1.3709, while moving within a daily range of 1.3658-1.3710. Last week the Forex pair slipped as low as 1.3609, which has been its weakest level since August 23rd (1.3607). The major currency pair has depreciated 0.34% so far in September, following another 1.08% loss in August.
Bond Yield Spread
The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled -11.13 basis points (-0.1113%) as of 8:15 GMT on Monday, down from -10.6 basis points on September 24th.
Daily Pivot Levels (traditional method of calculation)
Central Pivot – 1.3687
R1 – 1.3716
R2 – 1.3766
R3 – 1.3795
R4 – 1.3824
S1 – 1.3637
S2 – 1.3608
S3 – 1.3558
S4 – 1.3509