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 – A short lived short squeeze?
Charles Porter
Tue 9 Dec 2025
A short lived short squeeze? Sterling is undoubtedly benefitting from a short squeeze. Traders on net had increased positions that benefit from Sterling’s demise leading into the budget. Depending upon the participant’s persuasion, that could have meant gaining an outright short exposure to the currency or, in a more mild form, trimming any or all […]
Daily Brief – A week out
Charles Porter
Tue 2 Dec 2025
A week out Markets are now in their final few trading days ahead of a Fed blackout that will precede the Reserve’s decision next Wednesday. The US government shutdown, despite now feeling like a distant memory, continues to weigh on the Dollar and market pricing in general. In particular, as we approach the decision next […]
Daily Brief – The Hassett Trade
Charles Porter
Thu 4 Dec 2025
The Hassett Trade Not another one, I hear you say. So far this year we’ve seen bandied around the TACO trade, the Trump put, FOMO trade, the MEGA trade, surely there isn’t another to surface before year end?! Wrong. The so-called Hassett trade is that which is currently pushing the Dollar lower but coming to […]
