Sterling traded at 1.3643 against the dollar on Tuesday, up 0.09% on the day, after capping a six-month high of 1.3675 last week. The pair has remained trapped within a narrow band of 1.3600 to 1.3675 for two consecutive sessions, awaiting Wednesday’s U.S. inflation report and Friday’s Jackson Hole symposium for fresh direction.
Monday’s close at 1.3630 followed an intraday range of 1.3618 to 1.3676, a 58-pip movement that compares with the 120-pip average seen in the first half of August. Over the past month, sterling has advanced 2.62% against the dollar, while its 12-month gain stands at 1.37%. The pair added 0.91% over seven days and 2.07% over 30 days, having reached 1.3652 on August 21.
The recent advance began on August 19, when sterling cleared the 1.3600 resistance level and briefly exceeded 1.3630, driven by a sharp decline in long-term U.S. Treasury yields that reduced dollar demand. Prior to that breakout, the pound had spent most of August consolidating near 1.3500 despite resilient UK GDP data, failing to translate domestic strength into currency gains.
The euro’s performance mirrored sterling’s stall. EUR/USD traded at 1.1654 after rejecting a four-day high of 1.1711, while the U.S. Dollar Index recovered to 98.94 from a May 15 low of 98.55, down from a late-July peak of 101.40.
The current consolidation reflects a pause in dollar weakness rather than a shift in UK fundamentals, according to the analysis. The Dollar Index sits 39 basis points above its August 22 low and 246 basis points below its July peak, a counter-trend bounce within an established downtrend. Lower highs and lower lows since late July, alongside moderating oscillator signals, suggest the decline remains intact but lacks a reversal signal.
The dollar’s bounce stems from short-covering rather than renewed conviction, as traders pare positions ahead of two high-impact events: Wednesday’s U.S. inflation data and Friday’s Jackson Hole keynote. The consensus short dollar trade, held for four weeks, is being unwound mechanically, which could reverse once the catalyst passes unless it delivers a hawkish surprise.
Sterling’s technical outlook remains constructive above its 200-day simple moving average, a key threshold for systematic strategies. The analysis highlights two critical Dollar Index levels: 98.55 as support and 99.50 as resistance. A break below 98.55 could open room for GBP/USD to approach 1.3800, as the last such breach coincided with a 1.3675 print within 48 hours. A move above 99.50 would likely push the pound back toward 1.3600, potentially invalidating the August breakout.
The rally’s catalyst was not monetary but fiscal. On August 19, the U.S. Treasury announced it would at least double liquidity-support buyback operations in the 10-year to 30-year sectors, increasing the maximum from $2 billion to $4 billion per operation starting September 9 and running through November 4. Officials indicated funding could come from the $950 billion Treasury General Account rather than short-term bill issuance.
The announcement followed a quarterly refunding and arrived two weeks ahead of schedule, drawing criticism over the Treasury’s abandonment of its regular-and-predictable framework. The move triggered an immediate drop in long-term U.S. yields, undermining dollar demand and propelling sterling through 1.3600 within hours. The 10-year Treasury yield fell to 4.663% from above 4.70%.
Skepticism around the operation’s effectiveness may have reinforced the move’s durability. Prior buybacks saw roughly $20 billion offered against only $2 billion taken, as dealers showed limited appetite. Doubling the cap on an under-subscribed facility signals either a commitment to liquidity provision or an admission of its inadequacy. Estimates suggest deployable TGA funds range from $100 billion to $200 billion against a federal debt stock exceeding $40 trillion.
The currency market responded to perceived sovereign risk rather than a technical liquidity operation. UK 10-year gilt yields climbed to 5.247%, a 19-year high, while the dollar fell 2.8%. A currency weakening amid rising long-term yields points to credit concerns rather than a traditional rate-differential dynamic.
UK economic data last week reinforced sterling’s domestic support. The flash services PMI rose to 52.8 in August from 51.8 in July, surpassing all forecasts and marking a six-month high. The composite PMI climbed to 52.5 from 52.2, a four-month high, exceeding expectations for a decline to 51.6. The survey compiler estimated the readings imply third-quarter GDP growth of around 0.3%, aligning with the prior quarter’s performance.
Manufacturing provided a second positive signal. The CBI’s monthly order-book gauge reached its highest level since November 2024, supported by the strongest export orders in four years. The rebound in external demand diversifies the recovery beyond domestic services, which have driven growth for 18 months.
Price pressures remain a concern. Friday’s surveys showed a pickup in corporate price gauges, contrasting with easing input costs reported in the eurozone the same day. This divergence encapsulates sterling’s challenge: the UK is growing faster than expected with inflationary pressures rising, while the eurozone is expanding with disinflationary momentum. One configuration favors a hawkish central bank stance; the other suggests patience.
Retail sales offered a counterpoint, with volumes excluding automotive fuel falling 0.9% in July following a period of strong growth. Meanwhile, consumer confidence improved sharply, with the main index rising to minus 14 in August from minus 17 in July, the highest level in two years.
