FX round-up: Sterling dips as US bond yields crawl higher ahead of GDP data

Sterling slipped further on Wednesday, weighed down by a further move higher in US government bond yields, against a backdrop of negative reports surrounding Brexit, including a threat from the DUP to topple the government in Westminster if Northern Ireland is not accorded the same treatment as the rest of the UK.

That combination saw the pound give back a further 0.36% versus the US dollar to trade at 1.3927 late on Wednesday evening, although against the single currency it was higher by 0.21% at 1.145.

In parallel, the yield on the benchmark 10-year US Treasury note was climbing three basis points to 3.03%, whereas that on similarly-dated Gilts remained stuck at 1.54%.

The yield on the benchmark 10-year Bund meanwhile was flat at 0.63%.

US dollar strength was thus the main feature of the FX landscape, with the spot dollar index gaining 0.54% to 91.2570 - its best level in roughly a month.

On that note, Jane Foley at Rabobank took a positive view on the Greenback, pointing to technical resistance close above its recent trading range in the case of the euro, the fact that the market was already 'long' euros and "in recognition of the long-term draw of interest rate differentials".

She also mentioned other factors, including her expectation that the European Central Bank would not hike interest rates before September 2019.

"While higher US yields would provide the USD with another boost, in our view the USD may only need a trigger in order for it to catch up with last year’s widening of rate spreads."

Her remarks came ahead of the ECB's policy meeting and presser with chief Mario Draghi the next day. Analysts appeared to be unanimous in not expecting any change in policy, but question remarks remained regarding how cautious - or not- the Governing Council wanted to be in the process of tapering its programme of quantitative easing.

In the background as well, traders were waiting on Friday's UK GDP report for the first quarter, which might weigh on the Monetary Policy Committee's deliberations when they next met.

A preliminary reading on US first quarter GDP was also due on Friday, including data on the Fed's preferred inflation gauge, the core price deflator for personal consumption expenditures which some analysts had identified as a key risk event for US fixed income markets.

In a research note sent to clients on 24 April, analysts at Macquarie had said: "While it is possible that the [US] 10 year breaches 3% in coming days, with the release of the core PCE deflator on Friday a key risk (we expect 3m/3m core inflation to move to the highest level since 2008), we still feel that the more likely outcome is for the break to occur in Q3."

Versus the yen, the US dollar climbed 0.553% to 109.49 on Wednesday.