Pound Holds 1.3200 as Gilt Yields Near 5.51% Peak

The British pound (GBP) is trading at 1.3228 against the U.S. dollar (USD), down 0.1% from Friday's close. The pair has seen a 1.92% decline in September, currently fluctuating between 1.3182 and 1.3256. UK 10-year gilt yields have surged to 5.39%, nearing the 5.51% peak observed on October 1, the highest since July 2007.

Markets are pricing an 88% chance of a Bank of England (BoE) rate hike to 4.00% on November 5, following a 6-3 hold decision in September. The pound's weakness reflects conflicting forces: the strengthening dollar, driven by a sell-off in French government bonds, and the BoE's anticipated rate increase. The dollar index reached a fresh high of 102.53, pulling sterling lower before easing slightly.

The pound's decline began in late August, losing 454 pips or 3.3% to its current level. The first leg of the drop was dollar-driven, while the second was influenced by rising gilt yields and the BoE's hold decision. Despite the anticipated rate hike, sterling's lack of response suggests compensation for fiscal risk. The pair's range is bounded by 1.3140 and 1.3324, with the euro offering a clearer expression of sterling strength.

The dollar's strength is currently supported by a haven bid from Europe's bond rout, particularly in France. French 10-year yields reached 4.99%, and the euro hit a 17-month low at 1.1161. This dynamic creates an awkward dependency for sterling, with cable's direction hinging on whether French spreads stabilize. If they do, the dollar may weaken, allowing cable to recover toward 1.3300. If spreads widen further, the dollar could gain, bringing 1.3140 into view.