The GBP/USD pair has fallen to its lowest level in three months, trading at $1.3225 on Thursday, representing a 0.3% decline from the previous session. According to The Economic Times, the pair fell by as much as 0.5% on the day to a low of $1.3193, breaking the $1.32 mark for the first time since late June. The pound's decline comes as investors fret about the long-term impact of oil prices above $100 a barrel from a protracted Middle East war, along with higher borrowing costs and inflation that might follow. The FTSE 100 fell as much as 2% before unwinding some of those losses, as British 30-year gilt yields topped 6% for the first time since early 1998, with just four weeks to go until the Autumn Budget.
Fed rate hike expectations have surged dramatically, with analysts now pricing in almost 100 basis points of rate hikes in the year ahead following the Federal Reserve's first hike this month. According to MUFG/BTMU analysts, this trajectory is "reinforcing support for the US Dollar from the positive terms of trade shock for the US economy from higher energy prices." The US Dollar Index (DXY) shot to a fresh high since July 28 on Tuesday amid these bets for another Fed rate hike in October. The USD strength is being supported by inflationary concerns, which has been pushing US bond yields to multi-year highs. The U.S. dollar is pulling back from the two-month high reached yesterday as Treasury yields retreat, with U.S. data also weaker than expected, including Conference Board consumer confidence falling to its lowest level since May 2014.
Prime Minister Andy Burnham and Chancellor John Healey confront escalating gilt yields as their spending and borrowing plans face major challenges. As reported by The Economic Times, "Prime Minister Andy Burnham and Chancellor John Healey already have enough on their plate without a rapid increase in government borrowing costs since they took office. Gilt yields moving at such a pace presents a major challenge for their spending and borrowing plans," said AJ Bell investment director Russ Mould. In his maiden speech as prime minister at his Labour Party's annual conference earlier this week, Burnham said he would make changes to pensions to fund universal social care, something that could add to Britain's already strained finances. The government's financial position is further complicated by British 30-year gilt yields topping 6% for the first time since early 1998, creating additional pressure on fiscal policy.
Any move by the UK to rejoin the EU would likely be seen as a positive by the foreign exchange market, having witnessed sterling's crash following the Brexit vote in 2016, according to ING strategist Chris Turner. As reported by The Economic Times, "Obviously, we are years away from any clarity here, but let's see whether sterling catches a bid into a supposed UK-EU summit due around 20 November." In his recent speech, Burnham also said he would welcome debate on the UK moving closer to Europe again, something that many see as a potential step towards rejoining the European Union. This speculation provides a potential upside catalyst for the Pound, though any concrete developments remain years away.
The GBP/USD pair maintains a bearish near-term bias as it holds beneath the 20-period exponential moving average (EMA) at 1.3374, with the pair's inability to reclaim this EMA suggesting ongoing topside pressure. The RSI at 29.3 hovers near oversold territory, hinting that downside momentum could be stretched but not yet reversed. On the topside, immediate resistance is located at the 20-period EMA at 1.3374, which acts as the first barrier that bulls would need to clear to alleviate the current bearish tone. A sustained strength beyond could trigger a short-covering move and lift the GBP/USD pair back to the 200-day Simple Moving Average (SMA) at 1.3448. The GBP/USD has fallen more than 2% across September, remaining close to its three-month low, with any recovery more likely to confront stiff resistance ahead of the 1.3300 mark.
