Pound Rises as Treasury Buybacks Weigh on Dollar

The pound rose against the dollar on Wednesday, trading near 1.36054. The U.S. Treasury stepped up buybacks of long-dated bonds, injecting liquidity into the bond market, which weighed on the dollar and boosted major non-USD currencies like the pound. The previous day, the 30-year U.S. Treasury yield touched its highest level since 2007, raising concerns about deteriorating bond market functioning.

**Treasury Buybacks Ease Bond Market Pressure**

The Treasury's buyback of long-dated bonds directly targets the recent surge in U.S. Treasury yields, particularly the sharp rise in long-end rates. The 30-year yield's earlier multi-year high reflected deep market concerns over U.S. government debt supply and fiscal outlook. In the short term, the buyback helps absorb excess supply and smooth yield volatility, thereby reducing the appeal of dollar assets. The dollar index correspondingly retreated, providing upward momentum for the pound.

**Diverging U.S.-UK Policy Expectations Support Sterling**

The pound's strength also benefits from diverging policy outlooks between the Bank of England and the Federal Reserve. The UK economy grew 0.4% in the second quarter, with June GDP rising 0.3% month-on-month, showing resilience that leads markets to believe the Bank of England has more room to keep rates high to combat inflation. In the U.S., recent weak employment data, declining retail sales, and in-line inflation figures have cut market bets on further Fed rate hikes to around 30%. This expected interest rate differential forms the core logic behind the pound's strength.

**Technical Focus on 1.36 Level Battle**

From a technical perspective, $1.36 is a key resistance level for the pound in the short term, with the exchange rate currently contesting around this level. If upcoming UK CPI data comes in higher than expected, coupled with dovish signals from the Fed meeting minutes, the pound could test higher resistance zones further; conversely, if inflation cools or the Fed turns hawkish, the exchange rate may retreat toward $1.35 for support. Markets are closely watching upcoming UK and U.S. economic data and central bank signals later this week.