GBP Holds Firm as Oil Surge and Treasury Yields Climb
The British Pound (GBP) has shown surprising resilience despite rising US Treasury yields and a surge in oil prices, keeping the GBP/USD pair near 1.3250.
US Treasury yields have jumped by over 10 basis points, reaching 5.26%, while West Texas Intermediate (WTI) crude oil climbed more than 3% to $95.41 a barrel after President Donald Trump rejected Iran's proposal to reopen the Strait of Hormuz and warned attacks could resume after the US midterm elections.
Markets are pricing in further Federal Reserve tightening, with traders seeking a higher premium on the 2-year note and narrowing the spread to the 10-year, raising the risk of inversion. Historically, inversions have flagged recessions dating back to 1960, although that signal failed during the COVID pandemic.
With energy-driven inflation fears back on the table for the UK, Bank of England policymakers are contemplating further rate hikes. The narrowing spread between US 2-year and 10-year yields signals a prolonged restrictive stance by the Federal Reserve, which has historically preceded recessions in over 80% of cases since 1960.
The upcoming UK Autumn Budget on October 28 is also expected to be a major market mover for the domestic currency. Recent fiscal events, such as the 2022 mini-budget, remind us how sensitive Sterling is to government spending plans.