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Sterling Runs into Resistance; US Still Weak

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Sterling Runs into Resistance; US Still Weak

Sterling remained stable on Tuesday but investors took profits after the government reported a surprise level of inflation at the consumer level. Many have already priced in a chance of a tightening of interest rates by the BoE in 2014, but deflationary reports will give the central bank room to hold rates at accommodative levels for an extended period.

The UK reported that CPI in January fell 0.6% month over month, which brought the year over year rate to 1.9% from 2.0%. It was expected to be unchanged, with risks to the upside. The recent peak was 2.9% last June. The core rate, which excludes alcohol, tobacco, food and energy, fell to 1.6% from 1.7%. It was expected to have ticked up to 1.9%, and is now the lowest since June 2009.

Yields in the US edged higher last week, but were eclipsed by the pace of the increase in UK yields. US numbers continue to be disappointing, as the US released manufacturing data on Tuesday that was worse than expected.

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Sterling ran into resistance near the weekly high at 1.6750, and could pull back to support near the 10-day moving average near 1.6535. Momentum is still strong with the MACD (moving average convergence divergence) index printing in positive territory with an upward sloping trajectory. The RSI (relative strength index) which is an oscillator that measures the strength of momentum ran into resistance near 67. The last two failures of the RSI to push above the 70 level led to small selloffs in the currency pair. The RSI is currently printing near 66, which is on the upper end of the neutral range.

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