GBP/USD: The #1 most important factor powering cable’s relentless rally
February 24, 2021 4:02 PM
The tightening spread between UK and US short-term bonds makes GBP/USD more attractive to global investors
Through a global pandemic, Brexit, US political upheaval, and countless other storylines, there has been one constant in the FX market over the past 6-12 months: A relentless bid for GBP/USD.
After bottoming near 1.1500 as COVID fears peaked last March, the world’s third most-traded currency pair has rallied over 2,600 pips in the past 11 months to crack the 1.4100 handle this week.
What is driving the big rally in GBP/USD?
While there are myriad reasons for any market movement, the single biggest factor powering the ongoing GBP/USD rally is bond yields, or specifically the difference between short-term yields on UK gilts and US treasury bills. As the chart below shows, yields have been rising faster on 2-year UK bonds than their US rivals, representing a combination of Brexit relief, vaccination distribution, and expectations for a near-term economic recovery:
Source: TradingView, StoneX
The tightening spread between UK and US short-term bonds makes the UK (and by extension the pound sterling) more attractive to global investors. Even with today’s pullback in the measure (which has been driven more by a surge in US yields than any particular concerns about the UK economic recovery), the yield on 2-year UK bonds could still “flip” the yield on 2-year US bonds in the next week or two.
If seen, this development could drive additional flows into the pound at the expense of the greenback. In other words, despite the breathtaking surge we’ve seen over the past couple months, there are still potential near-term bullish catalysts for GBP/USD.
Key events for GBP/USD traders to watch over the next two weeks:
- Thursday, 25 February: US Preliminary GDP (13:30 GMT)
- Friday, 26 February: US Chicago PMI (14:45 GMT) and G20 Meetings (all day)
- Monday, 1 March: UK Final Manufacturing PMI (9:30 GMT) and US Manufacturing PMI (15:00 GMT)
- Wednesday, 3 March: US ADP Employment (13:15 GMT) and US Services PMI (15:00 GMT)
- Friday, 5 March: US Non-Farm Payrolls (13:30 GMT)
Learn more about forex trading opportunities.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.