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While headlines remain fixated on geopolitics particularly the ceasefire dynamic between Iran and Israel traders are shifting their attention to central banks again. And with good reason.
Chair Powell's comments in front of the House Financial Services Committee added fresh fuel to the bond rally.
Specifically, his statement that the Fed could cut rates "sooner rather than later" if inflation continues to moderate has solidified expectations that the July FOMC meeting is live. That came on the heels of a 15% plunge in crude prices, which already helped suppress inflation fears and sent yields lower.
Powell’s dovishness, backed by supportive commentary from Fed officials like Waller and Bowman, is aligning the stars for the Fed to move quicker than previously anticipated.
Markets have now fully priced in a September cut, and the odds of a July cut have climbed toward 20%, with the upcoming NFP print seen as a potential catalyst. If jobs disappoint, July becomes not just a possibility but a probability.
That’s been a key driver behind the USD weakness, with the DXY now sitting at its lowest levels since March 2022. In a "risk-on" environment, a softening Fed outlook only accelerates USD selloffs, especially against currencies with supportive domestic narratives.
GBP Outlook: BoE’s QT Rethink and Labour Market Concerns
Across the pond, the Bank of England has been just as active on the messaging front. Six MPC members spoke yesterday, and the tone is gradually shifting.
Governor Bailey hinted that the BoE’s quantitative tightening (QT) policy may be reviewed, with the September meeting potentially delivering a slower pace of balance sheet runoff. That comes as UK long-end yields remain under pressure and term repo facility usage hits records clear signs of tightening liquidity.
Moreover, labour market softness is starting to dominate the BoE’s risk framework. MPC member Greene flagged downside risks to growth via weaker employment dynamics, while Ramsden directly argued that the current labour data justifies more easing.
Should the BoE proceed with a QT slowdown, it would provide some supportive tailwinds for Gilts, and interestingly for GBP as well. In my opinion the pound has maintained a negative correlation with 30-year Gilt yields since the Liz Truss episode. Easing QT = Lower yields = Pound strength. And specially against the USD on this sell off, so looking to long GBP/USD would be a great opportunity looking high as 1.38 for GBP/USD.
Q: Why is the USD under pressure right now?
A: The USD is softening as markets price in a more dovish Fed. Powell’s “sooner rather than later” rate cut comment, combined with falling oil prices and risk-on sentiment, is pushing yields lower and weakening the dollar (DXY) across the board. A soft NFP next week would add to that downside momentum.
Q: Is a July Fed cut really on the table or is September more likely?
A: While July is still not the base case, it’s gaining traction especially after dovish remarks from Fed members Waller and Bowman. Right now, September is fully priced, but a weak labour market print next week could push July odds well above the current ~20% probability.
Q: How is the BoE positioning itself, and why does it matter for GBP?
A: The BoE is subtly shifting its tone. Multiple MPC members flagged labour market risks, and Governor Bailey hinted that a QT slowdown could be coming in September. That’s supportive for gilts and could reduce rate volatility ultimately helping GBP, especially in a risk-on environment.
Q: What’s the link between Gilt yields and the pound?
A: Since the 2022 UK mini-budget turmoil, GBP has shown a negative correlation with long-term Gilt yields. If the BoE slows QT and Gilt yields ease, it could be bullish for GBP, contrary to traditional thinking.
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