The pound-dollar rate in tug-of-war as the risk of “Feddie Krueger” returns to the radar

– GBP / USD at overnight low but volatility risk increases
– After ‘Feddie Krueger’ returns to Bond Street
– “Our attention is on the support close to 1.4000 / 18”

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  • GBP / USD reference rate at publication:
  • Place: 1.4180
  • Bank transfers (indicative guide): 1.3784-1.3883
  • Specialist money transfer rate (indicative): 1.4050-1.4080
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The pound-to-dollar exchange rate was weaker but hit overnight lows during the midweek session, alongside a once-downtrodden dollar, but could face further undecided trading in the future as evolution Federal Reserve The political conversation (Fed) leans against the strength of the pound sterling.

The British pound lost a fifth of a percent around 1.4150 on Wednesday, as it was higher against all other major price action counterparts as traders were drawn to the improving economic outlook UK towards a possible return of “Feddie Krueger” to the “street of global bonds”.

As the world’s largest central bank, the Fed’s monetary policy decisions and directions impact not only the prices of U.S. assets, but also those of other assets around the world, although more specifically on assets. traded on bond markets.

Currencies, including the pound sterling, are sensitive to bond yields and therefore to developments that impact them, although yields move in the opposite direction to bond prices, meaning that rising yields indicate unease among investors. bond market.

“GBP / USD recorded a key day reversal on Tuesday. Our attention has returned to the downside and the loss of 1.4091 May 27 low should refocus our attention on near support at 1.4000 / 18 Said Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

“The recent strength of the Asian currency against the greenback has stopped; USD / SGD: Bounces off support at 1.3189 / 56 and is expected to consolidate above for at least a week. USD / CNH: Formed a low at 6.3524 and should at least consolidate at 6.4116 / 19. EUR / CNH: Continues to hover around the 55-day moving average at 7.7922 – range limit, ”Jones adds.

It comes after a flood of remarks from Fed policymakers about the increase in seniority, all of which tentatively point to a quietly shifting stance on its $ 120 billion quantitative easing program.

As recently as Tuesday, the bank said it would gradually and orderly “begin to liquidate” the residual portfolio of assets that still appear on the Fed’s balance sheet even after the closure of the corporate credit facility of the United States. secondary market connected in December 2020.

Dollar pound rate

Above: Pound-to-dollar exchange rate shown at daily intervals with the US dollar index.

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The facility has sucked in secondary market corporate bonds during the acute phase of the pandemic, and its announced divestiture comes as questions emerge on the radar about the future of the government’s government bond and mortgage buying program. the bank that still buys a total of $ 120 billion per month.

In the US, the Fed’s (non-voting) Harker said ‘it might be time to at least think about spending cuts,’ but also noted that the federal funds rate will stay ‘low long, “said Elsa Lignos, Global Head of Foreign Exchange Strategy at RBC Capital Markets.

This type of discussion has the potential to increase bond yields in the U.S. and elsewhere while reviving the U.S. dollar for at least short periods of time in a market where exchange rates have already demonstrated upward cost sensitivity. loan.

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US bond yields have seen rises and, in some cases, surges, several times this year, which in each case brought a wave of capital back to the dollar, mainly at the expense of European currencies which were also in each case. quick to seize a new offer when bond markets have calmed down.

At the heart of the Fed’s and the market’s concerns are developments in inflation in unexplored economic waters.

“A list of stories that somehow put upward pressure on prices … In the US, Biden set to update Trump’s China blacklist (the US ban on investing in companies linked to the Chinese military), “RBC’s Lignos said. .

“The European Commission is about to propose a carbon border adjustment mechanism that will apply to all imports of electric energy into the EU. EU. They will be linked to the costs that EU producers are already facing and will apply a number of cement, fertilizer, iron and steel products (which will potentially increase the PPI substantially) ”, adds Lignos.

USD and bonds

Above: US, UK and German 10-year government bond yields.

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