GBP/USD drops sharply to low 1.4000s as US bond yields surge

• GBP/USD has dropped sharply in the last few hours but bounced at 1.4000.
• The downside is primarily a result of a US bond yield surge-induced recovery in the US dollar.

GBP/USD sold off sharply over the past few hours, dropping from session highs in the 1.4180s set shortly after the start of US trade to hit session lows at bang on 1.4000 in recent trade. The pair is now consolidating just to the south of the 1.4050 mark and trades lower by about 0.75% or over 100 pips on the day. Thursday is shaping up to be cables worst day since 15 January, though on the month, the pair still trades over 2.5% higher.

US yield surge drives dollar recovery

US bond yields are seeing a spectacular surgeon Thursday; 5 and 7-year bond yields are both up more than 17bps on the day, the 10-year bond is up more than 12bps on the day and has now rallied above 1.5% and the 30-year bond is up more than 6bps on the day and is above 2.3%.

While initial upside in bond yields (say, at the start of last week) was arguably caused by positive macro-economic developments (i.e. markets betting on higher growth and inflation ahead), the recent extension of upside appears to be more nefarious (i.e. NOT driven by positives); traders are citing reasons for the worsening US bond market sell-off including 1) Fed indifference, 2) a terrible 7-year bond auction that showed weak investor demand for new US debt, 3) systematic trend-following algorithms joining the selling and 4) month-end flows.

Higher yields not only make USD comparatively more attractive versus its peers but is also causing overvaluation concerns in the stock market (all major US indices have tanked on Thursday) which is resulting in a USD safe-haven bid. This seems to be a primarly reason as to why the US dollar has rallied over the last few hours.

In terms of why GBP is one of the underperforming G10 currencies on the day (GBP is lower against EUR, CHF, JPY, NZD and CAD as well as USD), that is less clear. Perhaps all the market turmoil has triggered some profit-taking across the major GBP pairings after a solid run of gains in recent weeks on the back of vaccine rollout and reopening optimism. Given the fact the UK’s vaccine rollout stands the country’s economy in good stead to outperform most of its developed market peers from the start of summer, investors and FX traders alike might look to buy any GBP dips.