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Sterling Edges Higher following Solid GDP Data

David Becker
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Sterling Edges Higher following Solid GDP Data

Sterling moved higher following the UK GDP climbing to the 1.6060-70 area even though the data exactly matched the consensus expectation for 0.7% quarter over quarter and 3.0% year over year growth. The GDP report shows what occurred in the rear view mirror while next week’s data releases, which include the latest CBI retail sales survey and monthly BoE lending data, come with downside risk attached. With the interest rate differential moving in the UK’s favor, Sterling should be able to gain traction.
Preliminary U.K. third quarter GDP estimate met expectations at +0.7% quarter over quarter and +3.0% year over year, declining from the second quarter’s 0.9% and 3.2% year over year. The solid showing will be better than most other developed economies. The breakdown showed all four sectors growing, with the big services sector pulling its weight with a 0.7% gain in Q3, industrial production rising 0.5%, construction up 0.8% and agriculture up 0.3%.

After dipping into negative territory at the beginning of October, the 10-year UK-US yield differential recovered back to the zero level. The differential is the difference between UK interest rates and US interest rates and is a key driver of the forward curve. When rates in the UK are lower than US rates, it becomes expensive to hold onto the GBP and therefore less attractive. While US rates moved higher on the back of demand for riskier assets such as stocks, the recent Ebola scare has kept interest in safe haven assets such as US treasury bonds.

The GBPUSD is consolidating trading near the 10-day moving average at 1.6050. Momentum on the currency pair is positive, but just barely and reflects a consolidative tone. The RSI (relative strength index) is printing a reading of 43, which is in the middle of the neutral range and also reflects a neutral tone.

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