Fresh Dollar and Bond Yield Rally Places Sterling's Recovery Trend in Jeopardy

"GBP/USD is slicing through the 200dma right now and if we can get through 1.1902 we will be through the 200dma/100dma in that pair and into some 'clear air' on the charts" - Jefferies.

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The Pound to Dollar exchange rate was on course for a hat-trick of losses when falling back below 1.20 to test important levels of technical support on the charts in the final session of the week as a fresh rally in American government bond yields put further wind into the U.S. Dollar's sails.

Dollars were bought widely on Friday when the Russian Rouble featured as the only large and liquid currency to remain afloat against the greenback once the Hong Kong Dollar is overlooked for having been supported near the lower end of the trading band permitted by its U.S. Dollar peg. 

Sterling was far from the biggest faller but still gave up enough ground to place it into a position of vulnerability near early January lows just beneath 1.19.

"We have made new highs in 2yr yields and highs in the USD for this mini cycle / correction higher we have been calling for in both. We still believe a correction into the 107/108 area in DXY is where we are headed," says Brad Bechtel, global head of FX at Jefferies. 

"GBP/USD is slicing through the 200dma right now and if we can get through 1.1902 we will be through the 200dma/100dma in that pair and into some 'clear air' on the charts. Target is 1.1500 for that pair," Bechtel adds. 

Above: Pound to Dollar rate shown at daily intervals with selected moving averages and Fibonacci retracements of various microtrends indicating possible areas of technical support. Click image for closer inspection.

Sterling's pains were the Dollar's gains and came as 02-year U.S. government bond yields neared their early November peak and as interest rates implied by Federal Funds rate futures broke out to new highs for the September and October months of this year. 

"Fed Presidents Mester and Bullard implied that a 50bp hike could be on the table for the March Fed meeting. We do not put much weight on these comments because both are known to be hawks and are non-voters. Moreover, it doesn’t seem that either Mester or Bullard have updated their view on the terminal rate but just think we should get there as fast as possible (this has been their view for a while)," says Sid Bhushan, an economist at Goldman Sachs.

"That said, the accumulation of a slightly more hawkish narrative across recent Fed speak (even Governor Waller has recently been more focused on the higher for longer message rather than softer wage data) does suggest there may be some increasing discomfort with the strength of the recent data among the FOMC partipcants," Bhushan and colleagues write in Friday commentary.

Friday's price action follows Bureau of Labor Statistics figures suggesting inflation pressures began to build again within corporate supply chains last month when Producer Price Index inflation rates echoed Consumer Price Index counterparts in remaining stubbornly elevated.

Above: Interbank reference rates for selected Sterling pairs at 13:02 GMT. Source: Netdania Markets. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Various measures for January have so far questioned whether an earlier observed process of disinflation can really be expected to pull U.S. inflation much lower in the months ahead, and the answer to this question is something that could have implications for the Federal Reserve (Fed) interest rate outlook.

This is especially so in light of the non-farm payrolls report released earlier in the month and suggesting that companies are both retaining workers as well as seeking to recruit more of them at robust rates even as the economy adjusts to the steep 450 basis point increase in interest rates from last year.

U.S. non-farm payrolls rose by 517k last month in a January outcome that was far stronger than all economists had anticipated, although pay growth ebbed slightly and so the report was perceived at the time as something that would not necessarily prompt a more 'hawkish' response from the Fed.

"For now, there’s enough uncertainty with the Fed (Brainard leaving, who replaces her?) alongside stronger data for markets to chase this theme for now. We’ll continue to assess incoming data," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

"We still think that the tracking error to terminal is much smaller now relative to last year. As such, it still feels like market repricing of terminal is a tactical theme – but we’ll respect price action for now and hold off on USD downside ideas," Rai says in Friday market commentary. 

Above: September 2023 Federal Funds rate future shown at daily intervals alongside 02-year and 10-year U.S. government bond yields. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)