Why I watch two-year gilts more than the FTSE when trading sterling

[FXS London Scalper]

When I trade GBPUSD or EURGBP in the morning, I keep a chart of the UK two-year gilt yield open next to price. It has turned out to be more useful than the FTSE 100, which is what I used to glance at.

Why the two-year:

• It is the part of the curve most tied to where the market thinks Bank Rate is going over the next couple of years, and rate expectations are the main short-term driver of sterling.
• The FTSE 100 earns most of its revenue abroad. A weaker pound raises the sterling value of those earnings, so the index often goes up when GBP goes down. As a read on sterling it is close to useless.
• On UK data mornings the yield reprices within seconds, and the size of that move tells me whether the market cares about the surprise or is shrugging it off.

How I use it in practice: if GBPUSD breaks higher while the two-year yield is flat or falling, I treat it as a dollar move and keep the target modest. If both move together, I am happier to hold for the full target.

It is a confirmation tool, nothing more. Does anyone use the FTSE 250 for this, since it is more domestic? I have never tested it properly.