Where we are: GBP/USD is trading near 1.3385, testing lows not seen since early April. Overnight, Cable ranged between 1.3370 and 1.3430, remaining on the defensive. The pair is trading notably below the previous New York close, weighed down by concerns about UK political stability and a broad risk-off sentiment.
What’s driving it: The pound is under pressure primarily due to growing domestic political uncertainty and its potential impact on fiscal policy. Concerns are mounting that Andy Burnham may challenge Keir Starmer, raising the spectre of looser borrowing limits and higher gilt yields; the UK 10-year yield has already hit its highest level since 2008. This downside is compounded by Trump’s comments pushing crude oil higher, fuelling inflation worries and necessitating further BoE rate hikes, of which the market already anticipates 70bp this year. The US 2Y yield is modestly lower at 3.98%, failing to offer Cable any respite.
- UK 10-year gilt yields reaching levels not seen since 2008 indicates substantial market anxiety regarding UK fiscal outlook.
- CFTC data reveals a crowded net-short positioning in GBP, with -63,908 contracts representing the 15th percentile, increasing the risk of a squeeze.
- The Bank of England’s cautious stance, demonstrated by an 8-1 vote to hold rates steady at 4.50% at their last meeting, is failing to support the currency amid political turbulence.
NY session focus: Traders will be closely monitoring any further developments regarding the UK political situation, along with broader risk sentiment driven by news flow out of the US. The 08:30 ET US data dump will provide short term direction. Key levels to watch are 1.3350 on the downside and 1.3430 as initial resistance. The short Sterling trade is currently working, while any long Cable positions are under considerable pressure. The pain trade would be a hawkish surprise from Huw Pill reversing the Sterling weakness.