January 09, 2025

“This week’s spike in volatility continued to underpin currency movements yesterday. The pound has taken the majority of the headlines with a 2.5% dive, as built up concerns about UK government borrowing have been taken out on gilts and sterling. Non-farm payrolls is the next big piece of data tomorrow, but anything could happen in the meantime.”

Sam Cornford – Head of Trading

USD

The attention is on bond market volatility and risk appetite this week, and the unnerving global rise in yields has proven to be a good environment for a firmer dollar. Concerns about fiscal policy, big issuances, tariffs, and sticky inflation data have all come to bear, triggering a bond rout in which the UK is at the centre (more on that in the next section) and that has intensified in recent days. A lot of commentary in markets has surrounded the peculiar fact that the US 10-year Treasury yield has risen by 100bps in the same period that the Federal Reserve has been cutting rates – by 100bps. The dollar also benefitted as the CNN reported yesterday that Trump is preparing to declare a national emergency to rush through his tariff agenda, though many were also quick to point out that this was always likely to be the route to enacting these measures. Meanwhile, a relatively dovish speech from the Fed’s Waller, who is often assumed to be aligned with the thoughts of the wider FOMC, never really caught that much attention, perhaps in part because his comments that rate cuts are still coming and that tariffs should not cause issues were quite convenient for someone on the shortlist to be Chair under Trump. No data today and traders will be preparing for tomorrow’s non-farm payrolls print, but we do get five Fed speakers and the market probably has one eye on Trump’s Truth Social feed.

GBP

The pound has fallen 2.5% over the past few days to its lowest level against the dollar since November 2023. The UK is at the epicentre of a global bond sell-off and yields are hitting records – the 10-year is at the highest since mid-2008, and the 30-year is the highest since 1998. GBP/USD typically has a very close relationship with the spread between the yields on UK gilts and US Treasuries – higher UK yields relative to the US mean stronger demand for the pound, all else equal. But what we are seeing here is a ’bad’ rise in yields that inverts the relationship, which is aesthetically similar to the Truss crisis in 2022, though not nearly of the same magnitude just yet. Of course, it is difficult to derive strength from higher yields when they are partly driven by mounting concerns about the government’s borrow-and-spend agenda and fiscal prudence, or while growth momentum has faded considerably and 75% of the voting public has no confidence in Reeves fixing that any time soon. The sustainability of these moves in the short term might be questionable, given that there was no catalyst to explain why a sell-off related to these ongoing concerns should occur at this particular moment. That may see sterling recover some of its losses in the coming days. Today, look out for a speech from the BoE’s Breeden.

EUR

The euro has sat rather quietly in the background so far this week. EUR/USD is back below the 1.02 handle as the dollar benefits from tariff and bond volatility, even as rate spreads have moved in the euro’s favour slightly, while GBP/EUR is trading at the lowest since November amid a sell-off in sterling. The domestic eurozone data is limited to a retail sales print this morning, where the consensus is looking for a 0.3% m/m rise in November.

Markets

The global rise in yields continued to place pressure on risk assets across markets, and stocks shed some gains in Europe while Wall St largely moved sideways.

Main Economic Events (All Times CET)

11:00am: Eurozone Retail Sales

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