The pound edged slightly higher against the dollar in European trading on Friday (October 9th), hovering around 1.3240, poised for a second consecutive gain, as a pullback in US Treasury yields after a strong rally boosted market sentiment. The 10-year Treasury yield fell 0.23% to around 5.22%. US Treasury yields are down more than 2.5% from the 20-year high of 5.36% reached this week. Lower US bond yields also weighed on the dollar, with the dollar index currently trading slightly lower around 102.00.

A pullback in US Treasury yields boosted risk appetite, sending the pound up to 1.3230.

The pound rose 0.1% against the dollar to around 1.3240 in European trading on Friday, as a pullback in U.S. Treasury yields after a strong rally boosted market sentiment. The 10-year Treasury yield fell 0.23% to around 5.22%. U.S. Treasury yields have fallen more than 2.5% from the 20-year high of 5.36% reached this week. This pullback indicates that selling pressure in the bond market has temporarily eased, giving risk assets a breather, and the pound, as a risk-sensitive currency, benefited.

The US dollar index briefly fell below 102, while a pullback in US Treasury yields weighed on the dollar.

Lower U.S. Treasury yields also weighed on the dollar. The dollar index briefly fell below 102.00, after previously touching an annual high of 102.54 but failing to break through, and subsequently retreated. U.S. Treasury yields retreated from a 20-year high of 5.36% to around 5.22%, weakening the dollar's interest rate advantage. The weaker dollar provided upward momentum for the pound against the dollar, pushing the exchange rate to around 1.3240.

The market is focused on the US CPI data next Wednesday, as inflation expectations will influence the Fed's path.

Meanwhile, investors are turning their attention to Wednesday's release of the U.S. September Consumer Price Index (CPI). This inflation data is expected to have a significant impact on the Federal Reserve's interest rate expectations, as several officials have stated that high price pressures from energy shocks and AI investment are key concerns. The minutes of the Fed's September meeting released Wednesday showed that "several officials warned that AI investment could eventually drive aggregate demand out of supply, putting additional upward pressure on prices." This statement indicates that concerns within the Fed about sticky inflation stem not only from energy but also from demand pressures from AI investment. Stronger-than-expected CPI data could strengthen expectations of an interest rate hike, supporting the dollar and suppressing the pound; weaker-than-expected data could further weaken the dollar and support the pound.

Risk appetite and yield pullbacks are supporting the pound, but CPI is the key variable.

The British pound is currently supported by both risk appetite and a pullback in US Treasury yields. The 10-year US Treasury yield fell to 5.22%, and the dollar index briefly dropped below 102, both providing upward momentum for the pound. However, the sustainability of this support depends on next Wednesday's CPI data. Strong inflation data could reignite bond selling pressure, pushing up yields and supporting the dollar, potentially causing the pound to give back its gains; moderate data could lead to further yield declines, and the pound could continue its upward trend. Before the CPI release, the pound is likely to remain around 1.3240, with its direction pending the data release. (GBP/USD daily chart, source: FX678) At 15:12 Beijing time, GBP/USD was trading at 1.3238/39.