Sterling Targets 1.3600 as Dollar Weakness Accelerates

GBP/USD surges past 1.3500 on broad USD selloff – Greenback extends decline to multi-week lows as markets eye Labor Day break – Technical setup suggests potential breakout toward 1.3600 and beyond

The British Pound is riding a strong wave of momentum as traders capitalize on a broader retreat in the US Dollar. With Monday’s opening in the US financial markets halted for the Labor Day holiday, the absence of major data releases has allowed the selling pressure on the Greenback to intensify, pushing GBP/USD firmly above the 1.3500 threshold. The Dollar Index (DXY) has tumbled to levels not seen since late July, breaking below the critical 98.00 support level, which continues to fuel demand for the British currency.

Technical Barriers and Upside Potential

The pair now finds itself eyeing the August 14 high of 1.3594, with bullish traders increasingly confident that a breach above this level could pave the way toward the 2025 peak at 1.3788 from July 1. Should momentum persist and Cable clears both of these barriers, the next significant barrier emerges around the October 2021 high at 1.3834. Conversely, downside protection remains intact with the weekly bottom at 1.3390 serving as the first support, while deeper floors sit at the August 1 low of 1.3141 and the May 12 base at 1.3139.

US Employment Data Takes Center Stage

Despite the Labor Day closure, this week brings heightened focus to America’s labor market dynamics as investors brace for critical employment reports. The Federal Reserve’s recent signaling of potential interest rate cuts later in 2024 continues to weigh on the dollar, as market participants assess whether such easing would gain traction given current economic data. This backdrop of potential rate cuts remains a key headwind for USD positioning.

Bank of England Signals Patience

Across the Atlantic, the Bank of England is widely expected to hold rates steady at its September 18 decision, reflecting a more cautious approach compared to potential Fed cuts. Market pricing currently reflects approximately 25 basis points of cumulative easing by March 2026, suggesting gradual policy normalization rather than aggressive cuts. The upcoming Treasury Committee meeting with BoE officials this week could provide insight into the timeline for future adjustments and any shifts in quantitative tightening strategy.

UK Economic Snapshot

Recent data releases paint a mixed picture for the UK economy. Nationwide housing prices contracted marginally by 0.1% in August, though mortgage approvals strengthened to 65.35K in July. The money supply gauge M4 expanded by 0.1% month-over-month in July, while the August S&P Global Manufacturing PMI printed at 47.0, indicating continued weakness in the sector. These figures will likely feature prominently in discussions between market observers and policymakers.

Understanding Gilt Yield Dynamics

UK government bond yields, or Gilt yields, represent the annual return investors receive from holding these securities. While coupons on Gilts remain fixed at issuance, yield calculations adjust continuously to reflect price movements—for instance, if a 100-pound Sterling Gilt with a 5.0% coupon falls to 98 pounds, the yield rises to 5.102%. Multiple variables influence these yields, but interest rate expectations and pound strength stand out as primary drivers.

Interest rate policy acts as the most influential factor, since higher rates increase coupons on newly issued Gilts, creating demand that supports Gilt prices while reducing demand for older issues. Inflation similarly impacts yields substantially, as rising price pressures erode the real value of future cash flows from bond holdings. Foreign investors holding Gilts face currency risk exposure, given that these bonds are denominated in Pound Sterling—a stronger pound amplifies returns while weakness diminishes them. This close correlation between Gilt yields and Sterling value creates important feedback mechanisms that traders monitor closely.