Forex
British pound slides amidst rising gilt yields and fiscal concerns
Investing.com — The British pound continued its recent decline against the dollar and the euro on Monday, driven by rising investor worries about the fiscal sustainability of Britain as gilt yields increased for the sixth consecutive day.
Sterling depreciated as much as 0.7% against the dollar, reaching $1.2103, its lowest since November 2023. It later settled with a 0.6% drop at $1.2125. In comparison to the euro, the pound was down 0.2% at 84.10 pence.
The pound has become a focus of global currency traders due to the impact of soaring global bond yields, primarily originating from the United States, on British markets. These rising yields stem from concerns about increasing inflation and a reduced likelihood of rate cuts from the Federal Reserve.
Strong U.S. labor market data released on Friday added fuel to the global bond yields, leading money markets to stop fully pricing in any rate cut from the Fed this year. Although higher yields often bolster the currency, analysts in Britain anticipate that the government may need to cut spending or increase taxes to adhere to its fiscal rules, which could potentially affect future growth.
On Monday, Britain’s 10-year gilt yield rose by 4 basis points to 4.879%, slightly below last week’s 2008 high of 4.925%. It had increased by over 24 basis points last week, marking its largest weekly rise in a year. Bond yields and prices have an inverse relationship. The 30-year yield in Britain reached its highest level in 27 years on Monday, hitting 5.472%.
This week, attention is also likely to center on British inflation data set to be released on Wednesday, which could influence the Bank of England’s monetary policy in the near term. Consumer prices are projected to have increased by 2.6% annually in December, matching November’s rate, while core CPI is expected to have eased to 3.4% from 3.5%.
Futures markets are currently pricing in around 16 basis points of easing at the BoE’s February meeting, which suggests approximately a 65% chance of a quarter-point rate cut.
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Investing.com– The Japanese yen exhibited minimal movement on Tuesday, despite Bank of Japan (BOJ) Deputy Governor Ryozo Himino indicating a potential hike in the upcoming policy meeting.
Himino suggested that the central bank might consider raising rates, citing sustained wage growth and expectations of a clearer U.S. policy landscape following President-elect Donald Trump’s inaugural address later this month.
The yen’s pair edged 0.1% higher to 157.62 yen on Tuesday.
In recent months, the BOJ has been adjusting its monetary policy to address rising inflation. In March last year, it ended its negative interest rate policy, and by July, it had increased the short-term policy rate to 0.25%.
These measures aim to achieve a stable 2% inflation target, supported by robust wage growth and a weakening yen, which have contributed to higher import costs.
Despite these developments, the yen’s exchange rate against the U.S. dollar remained relatively stable, reflecting market skepticism about the likelihood of an imminent rate hike.
Analysts suggest that while the BOJ is signaling a shift towards policy normalization, uncertainties surrounding global economic conditions and domestic wage dynamics may lead to a cautious approach.
Barclays (LON:) expects the central bank to implement rate hikes in March and October, with a terminal rate of 0.75%.
The BOJ’s next policy meeting is scheduled for January 23-24, where new growth and price projections will be discussed.
Investing.com — UBS strategists expect the US dollar “to stay stronger for longer,” citing robust US economic activity and ongoing tariff concerns impacting other regions.
Monday saw the (DXY) soar to its highest level since November 2022, trading above the 110 mark during the session. This represents a roughly 9% appreciation since late September.
The US dollar’s recent strength has been bolstered by better-than-expected domestic data, including nonfarm payrolls and the services sector purchasing managers’ index. These positive indicators have led to a decrease in the anticipated number of Federal Reserve rate cuts this year, with the consequent rise in US yields lending broad support to the USD.
While US economic data is expected to remain solid in the near term, the outlook for Europe is less optimistic, with subdued growth prospects.
Although growth in China is forecasted to accelerate to 5% year-over-year for the fourth quarter, the threat of US tariffs poses a significant risk. Political and economic uncertainties in South Korea, the European Union, and the UK have been linked to weakness in their respective currencies.
According to UBS, potential monetary policy divergence is among the key factors that could further propel the dollar upward in the near term.
While the Fed is expected to cut rates by a total of 50 basis points in the second and third quarters, the European Central Bank is projected to reduce rates by 100 basis points in the first half of the year.
“Policy divergence is a powerful driver of currencies, which leads to trending FX markets and the potential for overshooting exchange rates,” strategists led by Mark Haefele wrote.
The firm also points out that tariff risks may not be fully accounted for in the current USD valuation. Despite the dollar’s recent rally being largely attributed to solid US macroeconomic data, the introduction of new tariffs could drive the dollar even higher.
UBS suggests that if tariffs are implemented, the DXY could trade between 110 and 115, with significant impacts on other major currency pairs.
“If tariffs were to materialize, DXY could trade in a 110-115 range, could drop below parity, could slide below 1.20, and could move toward 0.94, in our view,” strategists noted.
However, the investment bank believes that the story of 2025 could be a tale of two halves, with the dollar strength in the first half of the year potentially reversing in the second half.
The current trading position of the USD, which is considered strongly overvalued and shows the highest level of dollar net length since 2015, supports this view.
UBS’s revised forecasts for the EUR/USD pair reflect this expected trajectory. Strategists expect the pair to trade at 1.00 in March, 1.02 in June, and 1.06 in December 2025.
In the case of China, despite the possibility of dramatically higher effective tariff rates, the CNY has only partially priced in this risk, with UBS reiterating its forecast for the to reach 7.50 by June.
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