Pound to Dollar Holds Near 1.32 as Bond Yields Surge and Fed Hike Expectations Persist

The Pound to Dollar exchange rate (GBP/USD) is facing pressure near three-month lows around 1.3200 as the US Dollar strengthens in global markets. Despite weak US payroll data reducing the chance of a Federal Reserve rate hike in October, higher US yields, cautious risk sentiment, and expectations of future tightening continue to support the Dollar.

The GBP/USD pair has found support below 1.32 but struggles to rise above 1.3250, testing near three-month lows after the US market open. The Dollar gained ground amid concerns over US and global inflation, with traders remaining cautious despite slight gains in equities.

UoB anticipates GBP/USD moving towards 1.3140 unless it breaches strong resistance at 1.3265. Lloyds Bank warns of a potential slide to or below 1.30. UK bond yields, particularly the 10-year yield around 5.40%, are impacting mortgage rates, with the five-year rate hitting 6% for the first time in three years.

MUFG notes that rising bond yields are increasing FX market volatility, making conditions tougher for carry trades. Matthew Ryan of Ebury highlights the Dollar's strength due to higher Treasury yields and safe-haven flows. The latest US employment report showed a smaller-than-expected increase in non-farm payrolls, shifting near-term rate hike expectations but keeping three hikes priced in by mid-2024.

ING emphasizes that the Dollar's strength comes from more resilient Fed tightening expectations compared to other central banks. The US ISM non-manufacturing index slightly declined but showed strong new orders and rising prices.