GBP/USD Tumbles as Rate Expectations Take Hold

The GBP/USD currency pair traded at 1.3230 on Tuesday, down 0.18% from Monday's close of just above 1.3250. The decline was driven by rate expectations, with every leg of the move mapping to a leg higher in U.S. yields.

On September 16, the day of the Fed's hike, GBP/USD closed at 1.33806. On September 22 it closed at 1.3344. On September 23, the day the 5-year Treasury crossed 5% for the first time since 2007, it dropped through 1.3300 to 1.32406.

The Bank of England is drifting toward a November hike, with markets pricing in more than an 80% probability of a 25-basis-point rise on November 5. However, the Fed at 3.75% to 4.00% is hiking from a higher base, and the policy spread between the two central banks remains narrow at 12.5 basis points.

Deputy Governor Ramsden said in London on Monday that there could be a case for raising Bank Rate if upside pressure on the inflation outlook keeps building. However, sterling barely reacted to his speech, as the market had already priced in the November move before he spoke.