GBP caves in to rising Gilt bond yields

* Dollar gains as US 10-year yields hits 8 and a half month high

* Trump mulls national economic emergency declaration for new tariff program

* Equities mixed after strong labour market data, FOMC minutes

* Fed officials saw need for ‘careful’ approach, will hold rates steady for now

FX: USD moved north again, closer to the recent December cycle high at 109.53. Reports suggested Trump may invoke emergency powers for a new round of universal tariffs. Treasury yields have pushed higher, though global yields, especially in the UK are surging. The prices paid subcomponent in yesterday’s ISM Services figure spiked higher adding to inflationary worries. Initial jobless claims were the lowest since last February. Fed officials saw risks of higher than expected inflation in a ‘finely balanced’ decision, as revealed in the FOMC minutes.

EUR softened below 1.03 as more Trump tariff headlines and weak German data hit the single currency. Rate differentials have held up relatively well. That means markets are straying further from fair value on many economists’ models.

GBP plunged as gilt yields spiked higher. The 10-year yield broke to the upside, hitting levels last seen in 2008 at 4.81%. Cable sold off by more than 1% for most of the day and through last Thursday’s cycle low at 1.2351.

USD/JPY advanced higher with an upside breakout from the recent range in play. We are in intervention territory or very close to it now. The BoJ is also in focus, though it is two weeks away. A weak yen is being cited as one reason for a rate hike this month.  The major has a strong correlation to the US 10-year Treasury yield. That is closing in on last year’s high at 4.73%.

AUD dipped again and looks to be firmly on its way to the recent low at 0.6178. Annual trimmed mean inflation printed at 3.2% in November, down from the prior 3.5%. The latter is an important pointer in the RBA’s inflation assessment and is moving closer to the bank’s 2-3% inflation target. Markets now see roughly a 70% chance of an inaugural 25 bps rate cut in February. USD/CAD was relatively little moved with the loonie outperforming its peers. Both domestic and foreign political fog could go on for some time.

US stocks: The S&P500 closed up 0.16% at 5,918. The tech-laden Nasdaq settled 0.04% up at 21,180. The Dow finished at 42,635, up 0.25%. Stocks were mixed as investors tried to navigate various drivers. Headline havoc will be a common phrase used this year it seems, with Trump 2.0 on the horizon. Inflationary concerns are rising which is pushing up bond yields. Rate cut bets are getting reined in as market sentiment becomes fragile. Quantum-computing sticks took a hit as the Nvidia CEO said he sees a long road ahead.

Asian stocks: Futures are mixed. Asian markets were mixed after weakness Stateside amid higher bond yields and hot US data. The Nikkei 225 reclaimedthe 40,000 level. The ASX 200 moved higher on strong miners and financials. Mixed CPI data kept the RBA on track to cut rates in February. China was pressured again with ongoing US/Sino tensions (we will be saying that a lot this year!)

Gold could be breaking higher amid a higher dollar, yields and inflation talk. Resistance sits at $2669 and then $2726.

Chart of the Day – GBP plunges as yields jump

There was much speculation about bond yields and UK gilts in particular as the long end touched levels not seen in years. The 10-year broke higher to 2008 levels while the 30-year hit 5.2%, which is the highest since 1998. Numerous factors are involved – Labour’s ambitious budget is the headline, with surging yields now erasing the Chancellor’s headroom that means spending cuts or more tax rises in the months ahead. Trump’s election victory, global supply pressures and sticky UK inflation data have also caused ructions. Ultimately, the mix of gilt pressure and the pound point to markets getting worred about a UK recession or fiscal event.

Sterling has been hit hard with positioning accelerating the move down. The best performing major currency versus the dollar last year has finally succumbed to USD strength. The major low sits at 1.2299 from April 2024. The bearish channel and momentum looks strong with near-term rebounds limited. But, like we said with the aussie chart yesterday, this is a big level…with a big risk event incoming on Friday in the US.

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