Pound Sterling Presses August Highs as Yield Spreads and Bearish Hedges Fading

The Pound Sterling is experiencing a strong recovery, reaching new highs and trading around $1.3545 early on Monday after last week's peak of $1.3560.

According to Scotiabank, the pound has a stronger underlying backdrop than its modest price movement suggests.

The bank attributes this support to firmer yield spreads and fading bearish hedges, which are providing fundamental backing for GBP at the same time as demand for protection against Sterling weakness has eased.

Scotiabank notes that UK-US spreads have extended their recent recovery, offering fresh fundamental support for GBP. The options market also reflects this trend, with risk reversals extending their recovery and fading the premium for protection against GBP weakness.