Sterling has remained strong as the Bank of England has left its Gilt purchase program on hold and the country released surprise data that showed the economy was stronger than many expected. Following a better than expected manufacturing report, the government released a better than expected GDP report which kept the country out of recession (two consecutive quarter of negative growth). Despite the strong patch, without assistance to further stimulate the economy, the UK is unlikely to show sustainable long term growth.
In early May, the UK released the CIPS manufacturing purchasing manager’s index which was better than expected, rising to 49.8 from 48.6 in March. Despite a print in contraction territory (below 50) the news was a positive follow up to the first quarters better than expected GDP report. The new order component rose above 50 which is a sign that future manufacturing should be positive.
Prior to the release of the PMI report, the UK released first quarter GDP. Analysts had been expecting a flat reading and were surprised by the 0.3% increase which generated positive momentum for both the Pound and the FTSE. Many believe the UK avoided a double dip. The economy seems to have stalled but market participants believe this is much better than moving in the wrong direction. Output is 2.8% below the first quarter of 2008 peak, prior to the demise of the global economy during the US financial crisis. Unfortunately, this respite will allow the hawks in the MPC to hold off on additional quantitative easing which is what the UK economy really needs.
Yield differentials between the US and UK 10-year tenor continues to point to a higher currency pair (as highlighted by forex training). Gilt yields, which are not seeing substantial artificial buying as experienced in the US, remain at a higher yield driving investors into the GBP/USD currency pair. The yield is now pointing to a potential target of 1.56.
Sterling broke out in early May jumping above resistance on the heels of better than expected economic data. Support is seen near the 10-day moving average while resistance is seen near a horizontal trend line near 1.5840. The trend in the GBP/USD is upward, with a relatively smooth trajectory.
Momentum on the pound is solid with the MACD (moving average convergence divergence index) printing in positive territory. The MACD generated a buy signal in late April where the spread (the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the spread. The RSI (relative strength index) is printing near 62, which is on the top end of the neutral range but losing trajectory which could be a sign of slowing momentum.
Author: Marcus Holland is the editor of FinancialTrading.com – a new but fast growing education resource.