GBP/USD tumbles on surge in US bond yields after FOMC minutes

• GBP is under pressure on subdued UK job data and ongoing Brexit squabbling.
• USD is being helped by higher US bond yield on concerns of ballooning US fiscal deficit.

GBP/USD is now trading around 1.3914, in late New York session, tumbling 0.6% and approaching the day low of 1.3904 fast as US bond yields surged after FOMC´s minutes. The USD got a boost from 10Y UST yield, which jumped to almost 2.96% after the FOMC  expressed concerns of slope of the yield curve, higher inflation, and higher US fiscal deficits.

Increased US government borrowing has applied steady upward pressure on Treasury yields. The Treasury Department has issued “monster” debts in anticipation of a higher deficit from last year's major tax overhaul and a budget deal that will increase federal spending over the next two years.

GBPUSD initially soared to as high as 1.4007 after FOMC minutes looks “less hawkish” than expected by the market, but soon it reversed its course on the renewed surge in US bond yields.

Earlier GBP was under pressure on subdued UK job data coupled with ongoing Brexit squabbling. But GBP also got some boost after an optimistic testimony by BOE/MPC

MPC sounded quite optimistic about UK economic prospect and wage growth despite significant worries about Brexit. GBP caught a bid when Carney downplayed the currency devaluation narrative and said that “we are probably at the peak point of impact of weaker sterling on inflation, but some impact will last for years longer and currency depreciation is not a good economic strategy and it makes a country poorer”.

The market is not concerned about absolute numbers of UK unemployment, but it’s concerned aboutwages´ growth. Although wage growth for Deccember 2017 came above estimate at 2.5%, it’s still way below the UK inflation rate of 3%; i.e. real wage growth is still negative and that is not good for consumer spending or private consumption.

Moreover, the downward wage  growth revision for previous period to 2.3% from 2.4% may be negative for the GBP along with an uptick in headline unemployment rate, which is the first rise for almost two years. The uptick in headline unemployment figure came primarily out of a surge in unemployment from the younger generation (18-24 years), which is a cause for concern.

Overall, this job report may be also an indication of the adverse effect of a stronger currency on Britain’s export-oriented economy and thus may force the BOE to stay on the sidelines in March as  the UK CPI at 3% is also well above the BOE´s tolerance level. The market may be now looking into May for any BOE rate hike amid dilemma of imported inflation and economic growth; consequently, GBP slumped.

In the ongoing Brexit saga, the UK official said they are in a broad alignment with the EU on the transition period. Meanwhile, UK PM  May is facing pressure after 62 Tory hardliners demand clean Brexit, with lawmakers challenging  Mayto take a harder approach on how far UK rules should move away from the EU after Brexit and the nature of the transition period.