Pound sterling confused by bond collapse

Fears about inflation, which the Bank of England spoke about today, are also pressing

Pound sterling confused by bond collapse

Sterling fell against the stronger dollar on Friday, retreating from a three-year high reached earlier this week as a crash in global bond markets plummeted yields and hurt the pound, while the Bank of England warned of inflationary risks.

After rising above $ 1.42 for the first time in three years, the pound fell to $ 1.3890 at 10:59 am GMT earlier this week, its lowest level since February 18.

Against the euro, the pound fell 0.1% at 87.03 after hitting a 10-day low of 87.30p in previous trading.

Bank of England chief economist Andy Haldane warned on Friday of the risk that inflation will be difficult to keep under control when the economy finally recovers from the pandemic.

Analysts also linked the drop in the pound sterling on Friday to a sell-off in bond markets.

US Treasury yields skyrocketed to their highest level since the start of the pandemic, driven by the prospect of faster growth and inflation that could spur interest rates rise faster than many expect. Bond yields made a sharp jump on Thursday, which observers linked to the triggering of stop-losses.

“The aggressive capitulation of long pounds has resulted in leveraged players leaving the overbought market,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

"The correction took place when the UK 2-10 curve flattened out at 2bp yesterday and the short pound rallied to close."

The pound is up about 2% this year as traders expect the rapid spread of the vaccine in the UK to help the economy recover from its biggest recession in 300 years.

Relief from the post-Brexit trade deal and easing expectations for negative interest rates by the Bank of England also boosted the pound sterling.

Sterling continues to rise for the fifth month in a row against the US dollar and euro, while analysts maintain a positive outlook for the currency.

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