US Dollar Climbs as Risks Swirl and Sterling Struggles for Traction

US Dollar, GBP/USD, British Pound, Treasuries, Gilts, China, Moody’s - Talking Points

• The US Dollar resumed strengthening this week on global growth questions

• China’s economy is facing scrutiny, pushing investors toward Treasuries and Gilts

• Sterling survived a test of support levels, but will GBP/USD continue to hold up?

The US Dollar shot higher going into Wednesday’s session despite Treasury yields dipping as markets appear to be seeking havens in an uncertain environment for global growth.

The demand for US government debt saw the return on the 10-year Treasury note sink below 4.0% before recovering back above it but some way from the 4.20% seen last Friday.

Yesterday saw China’s trade surplus come in larger than anticipated in monetary terms. However, both imports and exports volume dropped significantly, shedding -12.4% and -14.5% respectively year-on-year to the end of July.

Evidence of less economic activity in the world’s second-largest compounded concerns emanating from Moody’s downgrading several US small banks on Monday.

In the melee to buy US Dollars, Sterling threatened to break lower but caught a bid near some support at 1.2680.

A feature of both the Treasury and Gilts markets is the inversion of the 10-year against the 2-year notes. The US is trading near -75 basis points (bp) while the UK is around -50 bp.

When bond markets demand less yield at the back end of the curve, the implication is that difficult economic circumstances could be coming at some stage further down the track.

On the flip-side of the negativity, equity markets remain within striking distance of all-time highs, although they have been sliding in August after a stellar rally through July.

For currencies, if perceived risks to global output continue to grow, the US Dollar could see more upside. That could have the potential for GBP/USD to test support levels again.

GBP/USD TECHNICAL ANALYSIS SNAPSHOT

GBP/USD made a low at 1.2685 yesterday, which was just above the historical breakpoints in the 1.2670 – 1.2680 area and those levels may continue to provide support.

Below there, the recent lows near 1.2620 and 1.2590 might provide support. The latter currently coincides with the 100-day simple moving averages (SMA) that could add impetus.

Looking at the SMAs, the price is above the 55-, 100- and 200-day SMAs that all have positive gradients, while it is below the 10- and 21-day SMAs that have negative slopes.

This might suggest that near-term bearish momentum is unfolding but that medium and long-term bullish momentum remains intact for now.

On the topside, resistance could be near the recent peak at the psychological level of 1.3000, which concurs with a historical breakpoint.

Further up, the 16-month high of 1.3142 is also just below some breakpoints in the 1.3150 – 1.3160 area and may offer a resistance zone.

Overall, GBP/USD appears to be caught in a wide range. Click on the banner for more information on range trading.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Written by Daniel McCarthy, Strategist for DailyFX