Reversion
A defining feature of 2024’s FX market has been the inversion of many Dollar-termed forward curves. Despite the rising cost of holding US Dollars against the base of such currency pairs, the Dollar has remained relatively well bid. However, for those currencies that have emerged with a positive carry versus the US Dollar, FX demand has generally increased. One currency that has benefitted from this historically rare phenomenon has been GBP. The re-election of Trump poses a significant threat to whether this residual FX tailwind can endure with some US yields forecast to face upward pressure.
The front end of the US yield curve is likely to still decline. Interest rate cuts are still what will characterise the Fed’s output over the year ahead which will command shorter dated yields lower. However, Trump’s re-election, including the announcement of a wave of intended tariffs, as we covered yesterday, creates inflationary risks. That inflationary risk will raise borrowing requirements in the US and therefore the required terminal rate of interest. Both of these factors will steepen the US yield curve. The impact of that steepening on FX forward curves will of course depend on that currency pair in question.
With regard to GBPUSD, what UK yields are expected to look like is currently far from clear. The fiscal output of the new government and its treasury so far have created confusion and concerns of excessive debt. If these risks are contained, we may well see a reversion in GBPUSD forwards higher once again. With the US curve expected to steepen, prior to this general rising of the tide we may first see an inverted curve where a few tenors break out from negative territory before others.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Delayed fuse
Charles Porter
Thu 30 Apr 2026
Delayed fuse Last night’s Federal Reserve decision held all the potential requirements for a momentous occasion. Markets had been ascribing a high value to the event with options pricing suggesting the decision posed a significant risk towards exposed assets. Ultimately, the potential swan song publication of Chair Jay Powell passed without incident. Claims from some […]
Daily Brief – Long weekend
Charles Porter
Tue 5 May 2026
Long weekend For the UK, it was a long weekend in the sense that it brought with it the Early May Bank Holiday. For markets, it was a long weekend for a whole different reason. With most of the rest of the world not observing a bank holiday yesterday, market liquidity remained sufficient with few […]
Daily Brief – One pager
Charles Porter
Thu 7 May 2026
One pager Yesterday, a relief rally was underway covering virtually every corner of the market. Bonds rallied, equities rose and within FX the winners and losers were defined by a reversal of the trends that had previously emerged each time the Iranian conflict reared its head. The catalyst for the relief rally were headlines from […]
