Created
: 2024.09.02
2024.09.02 20:45
The British Pound (GBP) holds on to marginal gains during the European trading session on Monday, with US markets closed in observance of Labor Day. This means very slim volumes, even thinner than on a typical Monday. However, the UK market already had to digest the S&P Global/CIPS Purchasing Managers Index (PMI) for the manufacturing sector this morning, which fell in line as expected at 52.5.
Meanwhile, the US Dollar Index (DXY) - which gauges the value of the US Dollar against a basket of six foreign currencies - is still recovering from a chunky selloff over a week ago. Last week, though, the Greenback recovered on some strong US economic data, which might limit the initial rate cut from the US Federal Reserve (Fed) to only 25 basis points in September. With more PMI data set to come out this week and the US Jobs reports on Friday, it will all depend on this week's data to confirm the interest rate cut size next week.
The British Pound trades phenomenally high, at levels not seen since July 2023 against the US Dollar. The recent retracement last week is more than welcome, and now traders who want to go long GBP/USD will need to identify support levels on where it makes sense to get in for a retest of at least the year-to-date high, near 1.3237, or 1.33 for a fresh high.
On the downside, the moving averages are too far for now to offer any kind of support. It is better to look at a bounce off the upper band of the trend channel that was well respected during the past six months, at around 1.3120. In case that level does not hold, 1.3044 looks to be a nice nearby platform that worked as a resistance in August. Should more downfall occur, the 55-day Simple Moving Average (SMA) at 1.2869 falls nicely in line with a pivotal level since June 2023 at 1.2849, just 20 pips away from each other as a strong support area.
GBP/USD Daily Chart
UK Gilt Yields measure the annual return an investor can expect from holding UK government bonds, or Gilts. Like other bonds, Gilts pay interest to holders at regular intervals, the 'coupon', followed by the full value of the bond at maturity. The coupon is fixed but the Yield varies as it takes into account changes in the bond's price. For example, a Gilt worth 100 Pounds Sterling might have a coupon of 5.0%. If the Gilt's price were to fall to 98 Pounds, the coupon would still be 5.0%, but the Gilt Yield would rise to 5.102% to reflect the decline in price.
Many factors influence Gilt yields, but the main ones are interest rates, the strength of the British economy, the liquidity of the bond market and the value of the Pound Sterling. Rising inflation will generally weaken Gilt prices and lead to higher Gilt yields because Gilts are long-term investments susceptible to inflation, which erodes their value. Higher interest rates impact existing Gilt yields because newly-issued Gilts will carry a higher, more attractive coupon. Liquidity can be a risk when there is a lack of buyers or sellers due to panic or preference for riskier assets.
Probably the most important factor influencing the level of Gilt yields is interest rates. These are set by the Bank of England (BoE) to ensure price stability. Higher interest rates will raise yields and lower the price of Gilts because new Gilts issued will bear a higher, more attractive coupon, reducing demand for older Gilts, which will see a corresponding decline in price.
Inflation is a key factor affecting Gilt yields as it impacts the value of the principal received by the holder at the end of the term, as well as the relative value of the repayments. Higher inflation deteriorates the value of Gilts over time, reflected in a higher yield (lower price). The opposite is true of lower inflation. In rare cases of deflation, a Gilt may rise in price - represented by a negative yield.
Foreign holders of Gilts are exposed to exchange-rate risk since Gilts are denominated in Pound Sterling. If the currency strengthens investors will realize a higher return and vice versa if it weakens. In addition, Gilt yields are highly correlated to the Pound Sterling. This is because yields are a reflection of interest rates and interest rate expectations, a key driver of Pound Sterling. Higher interest rates, raise the coupon on newly-issued Gilts, attracting more global investors. Since they are priced in Pounds, this increases demand for Pound Sterling.
Created
: 2024.09.02
Last updated
: 2024.09.02
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