GBP/USD declines as the US Dollar strengthens due to increasing US Treasury yields and soaring oil prices. In July, US JOLTS job openings did not meet expectations, whereas ISM Manufacturing continued to show signs of expansion. Increased shop inflation in the UK has led markets to adjust their expectations, now anticipating a greater likelihood of forthcoming rate hikes by the Bank of England. GBP/USD continues to decline for the second consecutive day, currently trading near 1.3510 during the Asian session on Wednesday. The currency pair experiences a decline as the US Dollar strengthens, influenced by increasing bond yields and soaring oil prices that have rekindled worries about enduring inflation and possible interest rate increases. A global bond selloff has driven the US 10-year Treasury yield to 4.80%, marking its peak since early 2025.
Adding to the inflationary pressure, crude oil prices surged amid escalating hostilities between the United States and Iran, heightening significant risks of energy flow disruptions from the Middle East. Strategists highlight that, while US yields have moved higher, Bessent “pushed back against claims that rising Treasury yields reflected mounting concerns over US fiscal policy,” pointing instead to the “outperformance of US 10-year Treasuries relative to other major bond markets.” However, they caution that this “relative outperformance does not make the fiscal risk disappear,” warning that rising interest expense will ultimately “push up the US Treasury term premium,” and in doing so could leave the USD “more vulnerable to periods of fiscal stress.” Fed’s Barr conveyed a somewhat more hawkish stance, with the FXS Speechtracker score registering at 7/10, which is slightly above the historical average of 6.8/10. This reflects apprehension that inflation “remains too high,” despite the labour market being characterised as stable and the economy growing “solidly.”
The key remark that steady rates are favoured only if there is confidence inflation is moderating, coupled with a clear warning that a lack of progress would warrant an interest rate hike, maintains upside risks to the Dollar and indicates a low tolerance for renewed price pressures. Emphasis on investment driven by artificial intelligence as a growth driver indicates that the Fed is at ease with the current momentum, yet hesitant to jeopardise the entrenchment of inflation above target levels. The FXS Fed Sentiment Index decreased by 0.42 points to 128.86, suggesting a slight retreat in perceived hawkishness, even in light of the strong rhetoric reflected by the FXS Speechtracker. With the index still significantly above the neutral 100 mark, the Fed continues to maintain a hawkish stance, even as markets reevaluate the likelihood and timing of further rate increases.
Economic data from the US presented a varied landscape for market sentiment. In July, JOLTS job openings increased to 7.27 million, falling short of market expectations. In August, the ISM Manufacturing PMI experienced a decline, decreasing to 54.6 from the previous figure of 55.6. Despite falling short of projections, the reading remains solidly within expansion territory and continues to indicate a robust manufacturing sector. In the United Kingdom, expectations surrounding interest rates have experienced significant momentum. Markets are currently pricing in approximately 32 basis points of tightening from the Bank of England by year-end, with a November rate hike considered to have an almost 70% probability and a subsequent hike by February priced at 80%. The latest British Retail Consortium report reinforced these expectations, highlighting a sharp acceleration in UK shop-price inflation to a two-year high.
