May 26 2013

May 26, 2013 (By Marcus Holland of – Yields in the UK have been rising despite the recent selloff of riskier assets as investors continue to ponder how the MPC will deal with the UK economy once Carney takes the helm of the BoE.  The pound moved lower on Wednesday after the Bernanke testimoney as most riskier assets moved to the defensive.

Minutes from the Bank of England’s interest rate decision meeting were released with no real surprises during the middle of the week. The hawkish view remains on the MPC and the vote of 6-3 in favor of the status quo reflects that view.   The disappointing retails sales shows the economy is in desperate need of stimulus, despite a MPC that does not feel that way.  The 1.3% decline in April retail sales was the biggest in a year, compared with a forecast of 0.1% increase.

UK yields have started to tick higher throughout May after declining to the lowest levels seen since the summer of 2012.  The increase in yields are a reflection of a better than expected GDP report and a MPC that refuses to become more accommodative.

Despite increasing UK yields, the differential between the US and the UK is contracting.  The 10-year yield spread has contracted below par.  A break below this level would makes it more difficult to hold the pound, as traders will need to pay away by holding short positions in US yields.  The dollar has lost strength relative to most major currencies allow the pound to rebound slightly.

Friday’s better than expected durable goods orders failed to help the dollar gain ground again the pound.  The 3% increase was much better than the 1.3% expected by economists.  The surge in durable goods was mainly caused by a bump in commercial and residential aircraft.  Excluding these items durable good was in line with expectations.

Technically the pound is testing support levels near 1.50, a close below this level would likely test the lows made in early March near 1.48.  Resistance on the GBP/USD is seen near the 10-day moving average near 1.5130.

Momentum on the GBP/USD is negative with the MACD printing in negative territory.  The trajectory of the MACD is negative and is printing at the lowest level seen during 2013.  The MACD generated a sell signal in early May when the spread crossed below the 9-day moving average of the spread.  The RSI (relative strength index) which is an oscillator that measures overbought and oversold levels is printing near 40 which is on the low end of the neutral range.