Forex Market: GBP/USD eases from one-month highs, dollar supported as inflation concerns push bond yields up

GBP/USD eased on Monday, but remained not far from Friday’s one-month high, following hawkish remarks from Bank of England Governor Andrew Bailey over the weekend. He said that the central bank would need to act because energy prices push consumer prices higher.

There is now a nearly 30% chance of a rate hike by Bank of England this year, swaps pricing showed, and almost 80 basis-point hikes are priced through 2022.

Meanwhile, the US Dollar was a notch stronger against a basket of six major peers on Monday after slow economic growth in China and oil prices testing highs unseen since 2018 seemed to have made investors cautious. The DXY was up 0.10% on the day to 94.047, after climbing as high as 94.561 last week, its highest level in over a year.

China’s economy grew at the slowest rate in a year during the third quarter, as power shortages crimped plant output, data showed earlier on Monday.

“For some time our central argument has rested on two factors coming together to support the dollar, namely the moderation in global growth and the Fed taking a gradual path towards eventual rate hikes,” HSBC analysts wrote in a client note, cited by Reuters. “This occurred sooner than we expected.”

The recently released minutes from Federal Reserve’s policy meeting in September affirmed market expectations that asset purchase tapering could begin later this year. The document also showed the process could be wrapped up by mid-2022.

Meanwhile, inflation concerns pushed 2-year US bond yields to a fresh 19-month high of 0.421%.

As of 8:55 GMT on Monday GBP/USD was edging down 0.18% to trade at 1.3720, while moving within a daily range of 1.3717-1.3765. Last Friday the Forex pair went up as high as 1.3773, which has been its strongest level since September 17th (1.3813). The major currency pair has gained 1.87% so far in October, following a 2.06% loss in September.

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 -28.32 basis points (-0.2832%) as of 8:15 GMT on Monday, down from -18.0 basis points on October 15th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.3728
R1 – 1.3789
R2 – 1.3834
R3 – 1.3895
R4 – 1.3956

S1 – 1.3684
S2 – 1.3623
S3 – 1.3578
S4 – 1.3533