Where we are: GBP/USD is currently trading at 1.3486, down 0.36% on the day, having traded in a range of 1.3463-1.3541. The pair is under pressure, sitting below yesterday’s New York close, as sterling fails to capitalize on any risk-on sentiment visible in pre-market Dow futures.
What’s driving it: Sterling’s weakness stems from the underperformance of UK gilts relative to US Treasuries. The UK 10-year yield is at 5.007%, up just 2bp on the day, while the US 10-year is up 1.6bp to 4.364%, widening the US-UK yield spread to -64bp. This divergence suggests the market is more confident in the Bank of England’s cautious stance holding rates at 4.50% than the outlook for the Fed. The 8-1 vote split at the last meeting, with Dhingra dissenting for a cut, highlights the potential for a dovish shift if upcoming data disappoints.
- The widening US-UK 10Y yield spread is exerting downward pressure, as the market prices in a potentially divergent monetary policy path.
- UK unemployment remains elevated at 4.9%, reinforcing concerns about the strength of the labor market, even after the prior print showed a substantial decline.
- CFTC data shows net non-commercial GBP positioning at -52,039 contracts, which is moderately short, but not yet at squeeze-inducing levels.
NY session focus: All eyes will be on the 10:00 ET release of US CB Consumer Confidence, which is expected to show a dip to 89.0 from 91.8. A weaker-than-expected print could weigh on the dollar and provide some relief for GBP/USD, potentially targeting a retest of the 1.3541 intraday high. Conversely, a stronger reading would likely exacerbate the current downside pressure, potentially pushing Cable towards the 1.3450 level. The trade that’s working is fading rallies in GBP/USD. The risk to that trade is a surprise dovish shift in BOE expectations or a hawkish surprise from US data. The pain trade is a sustained rally above 1.36 driven by broad USD weakness.