British Pound drops as US Dollar strengthens on rising US yields, higher oil prices

GBP/USD extends its losses for the second successive day, trading around 1.3510 during the Asian hours on Wednesday. The currency pair loses ground as the US Dollar (USD) strengthens, driven by rising bond yields and surging oil prices that reignited concerns over persistent inflation and potential interest rate hikes.

A global bond selloff pushed the US 10-year Treasury yield to 4.80%, reaching its highest level since early 2025. Adding to the inflationary pressure, crude oil prices jumped amid escalating hostilities between the United States (US) and Iran, raising significant risks of energy flow disruptions from the Middle East.

Dollar support tempered by rising US fiscal risk premium

Strategists at Brown Brothers Harriman highlight that, while US yields have moved higher, Bessent “pushed back against claims that rising Treasury yields reflected mounting concerns over US fiscal policy,” pointing instead to the “outperformance of US 10-year Treasuries relative to other major bond markets.” However, they caution that this “relative outperformance does not make the fiscal risk disappear,” warning that rising interest expense will ultimately “push up the US Treasury term premium,” and in doing so could leave the USD “more vulnerable to periods of fiscal stress.”

Fed’s Barr warns on sticky inflation, keeps rate hike option alive

Fed’s Barr delivered a slightly more hawkish tone, with the FXS Speechtracker score at 7/10, modestly above the 6.8/10 historical average, underscoring concern that inflation “remains too high” even as the labor market is described as stable and the economy as growing “solidly.” The key remark that steady rates are favored only if there is confidence inflation is moderating, coupled with a clear warning that a lack of progress would warrant an interest rate hike, keeps upside risks to the Dollar intact and signals a low tolerance for renewed price pressures. Emphasis on artificial intelligence–driven investment as a growth driver suggests the Fed is comfortable with current momentum but unwilling to risk entrenching inflation above target.

The FXS Fed Sentiment Index slipped by 0.42 points to 128.86, indicating a minor pullback in perceived hawkishness despite the firm rhetoric captured by the FXS Speechtracker. With the index still well above the neutral 100 mark, the Fed remains firmly in hawkish territory even as markets reassess the probability and timing of additional rate hikes.

Economic data from the US presented a mixed backdrop for market sentiment. July JOLTS job openings rose to 7.27 million, coming in below market expectations. Simultaneously, the ISM Manufacturing PMI eased to 54.6 in August from 55.6. Although this missed forecasts, the reading remains firmly in expansion territory and continues to signal a healthy manufacturing sector.

In the United Kingdom (UK), interest rate expectations gained solid momentum. Markets are currently pricing in roughly 32 basis points of Bank of England (BoE) tightening by year-end, with a November rate hike seen as an almost 70% probability and a follow-up hike by February priced at 80%. These expectations were reinforced by the latest British Retail Consortium report, which highlighted a sharp acceleration in UK shop-price inflation to a two-year high.