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UK Bond Market Stabilization Fails to Support the Pound, while Structural Mismatch Hinders Short-term Performance
Summary:
The UK bond market's volatility eased following the Labour government's concessions on welfare reform, with the 10-year gilt yield decreasing from 4.36% to 4.22%. However, the British pound remains under pressure. The current exchange rate approaches a key demand zone, potentially offering a medium-term entry point for bulls.
PENDING
1.35000
ENTRY
1.38130
TGT
1.32900
SL
1.35424 -0.00165 -0.12%
--
Point
PENDING
1.32900
SL
CLOSING
1.35000
ENTRY
1.38130
TGT
Fundamentals
The UK market is currently focused on the new government's fiscal discipline and policy outlook. The government had to compromise on its initial welfare reform plans due to internal opposition within the Labour Party. This "policy retreat" calmed market sentiment in the short term, partially alleviating concerns about fiscal deterioration, which led to a decrease in UK gilt yields from their highs.
However, the pound remains weak, falling from last week's high of 1.3680 against the US dollar, reaching a low of 1.3215 on Wednesday. Interest rate pricing in the money market indicates that investors anticipate only a 25 basis point rate cut by the Bank of England in the next 12 months, which is a relative disadvantage compared to the Federal Reserve's more aggressive easing expectations.
More importantly, the trading logic of the pound has evolved from the “political premium” to a more structural “fiscal - monetary mismatch” concerns - Monetary easing, if it follows fiscal tightening, will likely pressure the British pound.
Moreover, UK June CPI met expectations at 2.0%, returning to the Bank of England's target for the first time since 2021, reinforcing expectations of a rate cut this year.
Despite this, the pound is unlikely to experience a systemic devaluation due to current fluctuations. Market participants will closely monitor the medium- to long-term policies of the new Chancellor, Rachel Reeves, whose continued tenure, supported by Prime Minister Starmer, should help restore market confidence.
Technical Analysis
Technically, the GBPUSD is currently undergoing a short-term correction. After declining from the previous high of 1.3787, it is now forming a potential support zone between 1.3215 and 1.3369. In the 1D timeframe, it indicates that the price is trading below the 20-day SMA, but has not yet fully broken the bullish structure.
If the current area can be maintained and a rebound occurs, breaking through the short-term resistance levels of 1.3607 and 1.3680, the pair will retest the previous high of 1.3787. A confirmed breakout would signal a new upward trend, with a potential target towards the 2023 high of 1.3813.
Key support is at 1.3215, which is also the previous consolidation platform and 50% retracement support. A break below this level would suggest a deeper correction.
Trading Recommendations
Trading Direction: Buy
Entry Price: 1.3500, 1.3450
Target Price: 1.3813
Stop Loss: 1.3290
Valid Until: July 24, 2025 23:55:00
Support: 1.3449, 1.3215, 1.3369
Resistance: 1.3607, 1.3682, 1.3751
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You understand and acknowledge that there is a high degree of risk involved in trading with strategies. Following any strategies or investment methodologies is the potential for loss. The content on the site is being provided by our contributors and analysts for information purposes only. You alone are solely responsible for determining whether any trading assets, or securities, or strategy, or any other product is suitable for you based on your investment objectives and financial situation.
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Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.
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