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Global Bond Market Selloff Extends after BOE signals more tightening ahead

  • BOE rate hike odds for the September 21st meeting stand at 87.3%
  • The VIX index trades above 16, to the highest levels in two months
  • FX Volatility starts to pick, Canadian dollar index rises to nine-month high

Wall Street is watching a global bond market selloff get uglier as US stocks waver ahead of massive earnings from Apple and Amazon. A lot of economic data confirmed how resilient the US economy remains. Both initial jobless claims still remain low and the ISM services employment component supports the argument that the Fed might need to deliver more tightening in November.

The global bond market selloff extended and the British pound weakened against the US dollar as the BOE decided to only go with a quarter-point rate rise. FX traders thought the statement was rather dovish but sterling reversed losses after BOE Governor Bailey expressed concerns about service inflation.  With only 2 MPC members voting for a half-point rate rise, the market is growing confident that the BOE might only have two quarter-point rate rises left. 

After hitting a one-month low, GBP/USD is in this awkward position as the BOE seems easily positioned to deliver more tightening than the Fed, but that could be followed by a stronger economic performance by the US economy. Now the FX market might view the risk of more tightening as bad news for a currency, as monetary policy should already be at restrictive levels.  

The global bond market selloff could also rattle markets and lead to strong safe-haven flows towards the US dollar and Japanese yen.  If the greenback remains bid, GBP/USD could see downside momentum target the 1.2600 region.  To the upside, the 1.2825 level provides initial resistance.

MarketPulse is a forex, commodities, and global indices research, analysis, and news site providing timely and accurate information on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors. This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

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