Forex Market: GBP/USD falls to a two-week low as rising bond yields, stimulus prospects lift US Dollar

GBP/USD extended the loss from last week and touched a fresh two-week low on Monday, as the US Dollar gained across the board with rising US bond yields and due to prospects of more fiscal stimulus.

The yield on 10-year US government bonds has risen by over 20 basis points to 1.1187% so far in 2021.

Expected to take office on January 20th, President-elect Joe Biden has promised “trillions” in additional coronavirus relief spending.

“It is hardly surprising that the recent acceleration in real U.S. yields has reminded the FX markets to end its focus on inflation and to assume a more comprehensive approach in its dollar valuation,” Commerzbank strategists wrote in an investor note.

Meanwhile, additional pressure on the Pound came after Britain’s chief medical adviser Chris Whitty warned that the next several weeks of the pandemic would be the worst so far in terms of hospitalizations.

Markets are pricing in the probability of negative interest rates by Bank of England for as early as May this year, with investors weighing the pandemic’s economic impact against vaccine progress.

“Although increased fiscal support has weakened the case for a quick rate cut, the UK has still been one of the countries worst affected by the pandemic,” RBC strategists wrote in a client note, cited by Reuters.

“Combined with the negative effects of Brexit, it means we continue to expect that the Bank will ultimately be forced to take rates negative.”

Bank of England policymaker Silvana Tenreyro is scheduled to speak on negative rates at 14:00 GMT.

As of 10:17 GMT on Monday GBP/USD was edging down 0.47% to trade at 1.3491, after earlier touching an intraday low of 1.3483, or its weakest level since December 29th (1.3439). The major pair has retreated 1.19% so far in January, following a 2.54% surge in December.

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 23.5 basis points (0.235%) as of 9:15 GMT on Monday, up from 18.9 basis points on January 8th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.3576
R1 – 1.3615
R2 – 1.3674
R3 – 1.3712
R4 – 1.3751

S1 – 1.3517
S2 – 1.3479
S3 – 1.3419
S4 – 1.3359