GBPUSD: Short Term Yield Spread Urges Caution

The pound continues to be well bid today after a strong rebound yesterday post the Bank of England minutes. However, if the pound is moving on the back of less dovish minutes from the BOE then we think that gains could be muted. Although the BOE may be moving away from QE, the MPC is still intent of keeping interest rates (particularly short term rates) low. Thus, the BOE is embarking on new policy territory that the FX market may not fully grasp: lose monetary policy without the need for more QE.

Misinterpreting the Bank of England communications:

While the pound appears to be rising on the back of the BOE abandoning QE, UK Gilt yields are falling. So which market is right? We tend to think the bond market may have the edge, as it seems to be moving more in line with the spirit of the BOE minutes that even though the Bank has dropped QE it is still looking to keep bond yields low.

This could thwart GBP gains in the medium-term. GBPUSD is the best performer in the G10 in the last 24 hours. But we think it may have got too far ahead of itself and could be due a pullback in the short term. The UK-US 2 year yield spread fell into negative territory on Wednesday, when this has happened in the past it has coincided with a weaker GBPUSD (see figure 1).

GBPUSD: A key resistance zone between 1.5265- 85 - the 100 and 50-day moving averages respectively - has thwarted the bulls so far, and we do not think that the macro back drop is supportive of further gains from here. Thus, it may act as a selling zone in the short term. Added to this, the hourly RSI looks stretched to the upside, which could also trigger some profit taking around this level. Short term support lies at 1.5205 - daily pivot, then at 1.5155 - the 55 hour moving average.

IMOH, Clement I.
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