Sterling extended its decline as UK government bonds sold off, pushing GBP/USD to just under 1.3200, its lowest level since late June and leaving the pair on course for a third consecutive weekly fall. The 30-year gilt yield rose above 6% on Thursday for the first time since 1998, while 10-year yields climbed to their highest since July 2007 after a new 10-year sale cleared at the highest yield for that maturity since 1999. Markets are pricing up to four Bank of England rate rises by next summer, with Bank Rate currently 3.75%, and the Chancellor is due to present a first Budget later in October.
With no UK data due on Friday, attention turns to US Nonfarm Payrolls at 12:30 GMT, forecast at 90K after 162K in August; unemployment is seen at 4.1% and average hourly earnings at 3.2% YoY from 3.1%. A firm reading could support the Dollar and lift gilt yields further, after gilts followed US Treasury yields higher on Thursday, while the Federal Reserve chair has stopped pre-signalling the next move ahead of the 28 October decision. Technically, 1.3250 has capped rebounds, a daily close above 1.3300 remains absent since 23 September, and Stoch RSI is near 9 after sitting below 20 for about three weeks.
Short Bias on GBP/USD and Immediate Volatility Triggers
We believe derivative traders should maintain a short bias on GBP/USD in the coming weeks, especially as the pair languishes below the critical 1.3200 level. Today’s US Nonfarm Payrolls release represents an immediate volatility trigger, where a stronger-than-expected jobs report could quickly push the pair down toward our first objective of 1.3150. Historically, strong US labor data exerts dual pressure on the Pound by boosting the greenback and driving global bond yields even higher.
With UK 30-year gilt yields soaring past 6% for the first time since 1998, we are seeing a dangerous market dynamic where both UK bonds and the Pound are falling together. During past fiscal shocks, such as the 2022 market crisis when yields spiked rapidly, GBP/USD experienced severe downward momentum as global investors demanded a higher premium to hold British assets. We advise traders to avoid buying this dip, as rising yields driven by inflation fears rather than tight monetary policy will likely continue to drag the currency down.
Key Risk Events and Downside Targets
We suggest closely watching the upcoming speech by Bank of England policymaker Catherine Mann on Tuesday for further clues on interest rate hikes. The market is currently pricing in up to four interest rate increases by next summer, which would bring the benchmark rate well above its current 3.75%. Any hawkish rhetoric confirming these expectations could temporarily shake up the market, but we expect the broader bearish trend to remain intact while daily closes stay below the 1.3300 resistance level.
As we move deeper into October, we recommend hedging positions ahead of Chancellor Healey’s highly anticipated first budget presentation. With the UK’s public debt-to-GDP ratio hovering near 100%, any signs of unbacked fiscal spending could trigger a repeat of historical sell-offs in the gilt market. We view the 1.3100 level as the next major downside target for traders utilizing options or short-term contract strategies to capitalize on this fiscal uncertainty.
