Sterling rallies on rate differentials despite global yield spike
Pound holds gains as rate differential favors sterling despite global bond selloff.
The pound is holding onto a 0.2% gain against the dollar (GBP/USD), trading at $1.2573 in early North American session on Monday, buoyed by interest rate differentials between the UK and US even as gilt and Treasury yields surge in tandem.
Traders are expecting the Bank of England to sustain higher interest rates for longer compared to the Federal Reserve, keeping sterling supported barring any big downside surprises in upcoming inflation data.
The currency pair got an extra boost from the unwinding of recent yen longs, gaining 1.27% against the Japanese currency after reports the Bank of Japan sees no need to end negative rates soon.
For now, sterling seems poised to ride out global bond market turmoil, with market pricing pointing to UK rates topping out later and higher than US rates over 2023-24.
Technicals also back the pound, with the 50% Fibonacci retracement level and a cluster of moving averages providing support around $1.24. A much weaker-than-expected UK CPI print on Dec. 20 poses the main downside risk for cable.
