US 10-year yield dip ahead of GDP report
As I write, the Ten-year treasury yield in the US has declined to 2.298%. The two-year note yield has also declined to 0.528%.
The slight decline in the yields at the short-end and the long-end of the market curve indicates that the markets are pricing-in a slowdown in the Q3 US GDP to 3.3%, from the previous print of 3.5%.
UK Gilt yields may stabilize as rate hike delay already priced-in
Meanwhile, the Ten-year UK Gilt yield has weakened to 2.026% from the day’s high of 2.045%. The yields fell after the Bank of England governor Mike Carney, while addressing the Treasury Select Committee, expressed a high possibility of inflation falling below 1%.
Moreover, the concerns expressed by governor Carney and other BOE officials today have already been priced-in by the markets after the dovish quarterly inflation report released earlier this month. Hence, the fall in the Gilt yields is likely to be temporary.
US Ten-year yield likely to breakout from the trading range
The US Ten-year yield has been restricted in a range of 2.4% to 2.27% since Oct 29.
The range has persisted since then, despite the release of the monthly jobs report, US CPI data and Federal Reserve minutes (Fed).
However, the yields are more likely to break out of its trading range through the lower end if the US GDP estimate prints lower than the market expectation of 3.3%.
In such a case, the ten-year yield can extend the fall to 2.22%.
Moreover, an upside breakout from the range is unlikely, as it would take a surprisingly strong US GDP number to push the ten-year yield in the US closer to 2.4%.
Thus, the likelihood of the ten-year yield either staying mute around 2.3-2.32% or falling below 2.7% is higher.
Pound set to gain
Given the action in the UK and US benchmark bond yields, the yield spread is more likely to tilt in favor of the British Pound post the US GDP data.
Technically, the GBP/USD pair appears poised to test 1.5730-1.5740 levels after having bounced-off repeatedly from 1.5620 levels in the past few sessions.
A break above 1.5740 shall open doors for a technical target of 1.5880 levels on the hourly chart.
Even if the US GDP prints in-line with the expectation or slightly higher than expected, the weakness in the GBP/USD pair is likely to be restricted around 1.5620 levels.
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