Market Data 
- The British Pound is still in snooze mode on Monday.
- UK Manufacturing PMI comes in line with expectations at 52.5 in August.
- The US Dollar Index opens up steadily, with US markets closed for public holidays.
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.
Daily digest market movers: A very slow start for all
- S&P Global released its Manufacturing Purchasing Managers Index (PMI) for August, coming at 52.5, the same pace as the previous month.
- US markets are closed in observance of Labor Day on Monday.
- The CME Fedwatch Tool shows a 69.0% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 31.0% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 48.9%, while there is a 42.0% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 9.1% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- Regarding the Bank of England (BoE), markets are pricing in no rate cut for the September 19 meeting, while the November 7 decision has an 87.2% near certainty of seeing the BoE cut rates by 25 basis points.
- The US 10-year benchmark rate trades at 3.90% and will not move on Monday due to the US bank holidays.
- The UK 10-year Gilt Benchmark trades at 4.06% and popped higher on Monday after closing at 4.01% on Friday.
- European equities are eking out more losses, losing over 1% on the day. The UK’s FTSE 100 is less negative and flirts with less than 0.5% of losses.
GBP/USD Technical Analysis: That is quite high
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 FAQs
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.
