Forex Market: GBP/USD gains as a drop in US bond yields pressure dollar, US coronavirus relief talks, macro data, BoE decision eyed

GBP/USD edged up during early European session on Wednesday, while trading just below the 1.3100 mark ahead of UK and US macro data sets later today and Bank of England’s policy decision tomorrow.

The US Dollar weakened against a basket of six major peers as the stalemate over US fiscal policy brought forth a speculation that additional monetary stimulus might be needed to prop up economy, driving US bond yields lower.

The yield on US 10-year bonds dropped to 0.512% on August 4th, or the lowest level in at least 13 years.

“U.S. economic outperformance, relative to the eurozone and Japan, is no longer guaranteed given the damage from the COVID-19 pandemic,” Tai Hui, chief strategist at J.P. Morgan Asset Management, said.

“Dollar interest rates are also converging to other developed economies’ interest rates, which means that the dollar is less appealing,” he added.

Market focus remains on US coronavirus relief bill talks, as White House negotiators have pledged to work “around the clock” with Democrats in Congress to reach an agreement by the end of the current week.

The Pound has rallied remarkably over the past several weeks, despite uncertainty that still surrounds post-Brexit trade relations between the UK and the European Union.

According to ING’s Francesco Pesole, the Pound’s advance was triggered by “the virus situation in the UK that is looking once again quite worrying in the sense that we are hearing about the possibility of the UK government reimposing economic restrictions.”

“The economic outlook for the UK is already quite grave and this would naturally add to that,” Pesole said.

As of 6:55 GMT on Wednesday GBP/USD was edging up 0.14% to trade at 1.3089, while moving within a daily range of 1.3058-1.3097. Last Friday it climbed as high as 1.3170, or a level not seen since March 9th (1.3201). The major pair advanced 5.52% in July, while marking a second straight month of gains and its best monthly performance since May 2009. It has gained 0.04% so far this week.

On today’s economic calendar, at 8:30 GMT IHS Markit/CIPS will release the final data on UK services sector activity for July. The respective Purchasing Managers’ Index probably came in at a final 56.6, according to market expectations, which would confirm the preliminary estimate. It indicated the strongest expansion in services sector activity since July 2015.

A report by Automatic Data Processing Inc at 12:15 GMT may show employers in the US non-farm private sector hired 1.500 million workers in July, as expected by analysts. In June, private businesses hired 2.369 million employees.

A separate report by US Bureau of Economic Analysis at 12:30 GMT may show trade deficit narrowed to USD 50.1 billion in June, according to expectations, from a deficit figure of USD 54.601 billion in May. The latter has been the largest shortfall since December 2018.

And, last but not least, a report by the Institute for Supply Management at 14:00 GMT may show activity in the US sector of services expanded at a slower rate in July. The respective Non-Manufacturing Purchasing Managers’ Index is expected to come in at a reading of 55.0, after it was reported at 57.1 in June. The latter indicated the strongest expansion in activity since February.

Pound traders will be also expecting the outcome from Bank of England’s policy meeting tomorrow, with money markets already pricing in the probability of negative interest rates by early 2021.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 19.3 basis points (0.193%) as of 6:15 GMT on Wednesday, up from 18.7 basis points on August 4th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.3054
R1 – 1.3126
R2 – 1.3180
R3 – 1.3252
R4 – 1.3324

S1 – 1.2999
S2 – 1.2927
S3 – 1.2873
S4 – 1.2818