Pound-to-Dollar Forecast: USD Slides as Treasury Buybacks Send GBP Above 1.36
– Written by
David Woodsmith
STORY LINK Pound-to-Dollar Forecast: USD Slides as Treasury Buybacks Send GBP Above 1.36
The Pound to Dollar exchange rate (GBP/USD) has surged to fresh three-month highs above 1.3630 as the US Dollar came under sustained pressure following Treasury action to calm the bond market.
A sharp initial retreat in long-term US yields undermined Dollar demand and propelled Sterling through 1.36, putting the May high around 1.3660 firmly within reach.
GBP/USD Forecasts: Three-Month Highs
The Dollar came under sustained pressure after the US Treasury moved to calm the bond market, allowing the Pound to Dollar (GBP/USD) exchange rate to surge to fresh three-month highs above 1.3630.
GBP/USD traded around 1.3632 on Thursday afternoon, extending Wednesday’s sharp advance and moving closer to the May highs around 1.3660.
Scotiabank commented; “Underlying trend signals remain constructive and keep the focus on a retest of the mid-1.36s.”
There was no significant Sterling reaction to the latest UK inflation data, with global bond-market developments continuing to dominate currency moves.
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The Dollar suffered a sharp setback after the US Treasury announced that it would double the size of liquidity buyback operations for longer-dated government securities.
Buybacks for 10- to 30-year Treasury debt will increase from $2bn to at least $4bn per operation, in a move aimed at improving market liquidity after the surge in long-term borrowing costs.
The announcement triggered a sharp drop in yields, with the 10-year Treasury yield falling below 4.65% on Wednesday.
Lower US yields undermined Dollar demand and encouraged a broad recovery across major currencies.
CIBC head of G10 FX strategy Jeremy Stretch commented; “What we’ve seen in the course of recent days is that the long end of the bond market has obviously been selling off and potentially becoming somewhat problematic for the play through to other asset classes.”
He added; “Clearly, the Treasury Secretary has to be mindful of those risks and has made adjustments.”
Rene Albrecht, senior analyst at DZ Bank, also highlighted the political and economic implications of elevated borrowing costs; “I think they fear the pain of 5% or higher yields on the long-end, not only because it raises the interest rate costs for the government but also for the private sector.”
US economic data will remain important as markets assess underlying inflation pressures and the outlook for both bond yields and Federal Reserve policy.
ING commented; “Another batch of CPI and jobs data, plus the end-of-month Jackson Hole symposium, will have a bigger say in whether the Federal Reserve hikes in September.”
The bank’s base case remains that the Fed will leave rates unchanged and that the Dollar will weaken modestly.
The minutes from the Federal Reserve’s July meeting showed that policymakers had become increasingly concerned about inflation.
Several officials indicated that they would be prepared to support another rate increase if inflation failed to moderate, reinforcing the view that a September move has not been completely ruled out.
Markets nevertheless continue to see a hold as the more likely outcome, particularly after softer US inflation, retail sales and employment data during recent weeks.
The headline UK inflation rate increased to 2.9% in July from 2.6%, in line with consensus forecasts, while the core rate held at 2.6%.
Markets continue to price at least some risk of another Bank of England rate increase this year, although many investment banks remain unconvinced that further tightening will ultimately be required.
HSBC UK economist Elizabeth Martins commented; “A big rebound in energy prices would certainly change things. But the real game changer for the MPC, I think, is around second-round effects.”
GBP/USD has now cleared the 1.3600 resistance area and reached fresh three-month highs above 1.3630.
Scotiabank’s mid-1.36s objective is therefore coming into focus, with the May high around 1.3660 representing the next important technical barrier.
A sustained break above 1.3660 would strengthen the bullish short-term trend and expose 1.3700, followed by the January trading range above that level.
Initial support is now located around 1.3600, with a deeper correction potentially bringing 1.3550 back into focus.
The US Dollar outlook remains highly sensitive to the US bond market.
Wednesday’s Treasury intervention produced a substantial initial decline in long-term yields, but that relief has already begun to fade, with Treasury yields moving higher again on Thursday as investors questioned whether larger buybacks can address the underlying fiscal and inflation concerns.
Further increases in long-term yields could therefore restore some Dollar support.
On the other hand, renewed declines in US yields, combined with softer economic data and fading expectations of a September Fed hike, would leave GBP/USD well placed for another test of the 1.3660 area.
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TAGS: Pound Dollar Forecasts
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