Sterling outperformed on Tuesday, climbing off overnight lows near 1.3200 as global yields and oil prices retreated, with traders squaring positions ahead of upcoming US and UK CPI releases and the UK Autumn Budget on October 28.

GBP/USD's bid was likely just position curating as traders prepared for US CPI on Wednesday, UK August GDP and output data on Thursday, UK CPI on October 21, and the most significant UK asset-related event — the Autumn Budget.

Market expectations suggest persistent inflation due to high oil prices in recent weeks. However, the drop in global yields might indicate that traders believe recent elevated yields have already addressed some inflationary pressures, potentially stifling demand and curbing price rises. UK 10-year gilt yields have retreated from their recent highs, trading around 5.35%, down from above 5.5%, which were influenced by fiscal instability in France.

Despite ongoing inflation concerns, which are expected to hinder growth and exacerbate fiscal challenges, the issue remains a global phenomenon affecting both developed and emerging markets. The UK Autumn Budget is particularly critical for gilts and sterling, as any misstep by the Burnham government could lead to an increase in UK yields, thereby placing additional downward pressure on the pound.

Currently, GBP/USD remains confined within its recent 1.3280-1.3180 range. With potential headline risks surrounding the upcoming UK and US data, traders are likely to adopt a cautious stance, awaiting fiscal insights from the budget announcement before significantly altering positioning.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)