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Sterling Rebounds as Risk Trades Gain Traction

David Becker
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Sterling Rebounds as Risk Trades Gain Traction

Sterling was able to gain traction on Friday as risk on trades gained traction following Fed governor Bullard’s comments on Thursday. With the markets gyrating from excessive volatility a voice of stability helped calm the capital markets. The dollar was also benefiting from better than expected U.S. data released on Thursday showing that jobless claims were robust and Industrial Production was solid.

Central Bank Governor Bullard raised the possibility of stretching quantitative easing out a bit longer, even though he was clear that his GDP forecast of around 3% in the second half of 2014 and for 2015 has not changed. The markets now project only a 25 basis point rate hike by the end of 2015, when prior to the recent round of volatility, the market had priced in 75 basis points of rate increases.

On Friday the BoE chief economist said “rates could remain lower for longer” during a speech, now widely reported, and that the U.K. economy is “writhing in both agony and ecstasy.” Haldane also remarked that the economy is at risk of “secular stagnation.” Haldane’s remarks follows BoE Governor Carney’s message this week, that policymakers are taking into account “a more modest global recovery, particularly if that’s the case in Europe.” The dovish comments helped the risk on trade pushing sterling higher.

The GBPUSD recaptured the 10-day moving average at 1.606, with target resistance seen near the October highs at 1.6250. Momentum has turned positive with the MACD (moving average convergence divergence) index generating a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The RSI (relative strength index) moved higher with price action, reflecting accelerating positive momentum, which printing a reading of 45, which is in the middle of the neutral range.

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