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UK Inflation Should Drive Sterling

David Becker
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UK Inflation Should Drive Sterling

Sterling made a valiant effort in attempting to breakout above the February highs near 1.6822. Thursday’s market route in the US led investors back into the greenback, despite a decline of long term US yields below 2.67. Next week the focus for pound traders will be the UK PPI and CPI reports which will shed light on inflation expectations.

Next week on Tuesday the UK will release a number of key inflation figures. The consumer price index is expected to show an increase of 0.2% month over month and a 1.6% increase year over year. Any number north of 2% will give a boost to the pound. Producer prices are also scheduled to be released. Traders will be focusing on the core number which is expected to increase 0.9% year over year. The retail price index will also be released; expectations are for an increase of 2.5% year over year.

The decline in US interest rates was met with an equally impressive selloff in UK yields. UK yields held up slightly better which allow the interest rate differential between the US and the UK to move in the UK’s favor which in turn allow the currency pair to move higher during the beginning of the week.

chart-uk-inflation-drive-sterling.png

The GBPUSD moved higher in the early stages of the week, after the UK released a stronger than expected manufacturing output report. The sterling tested resistance near 1.6822, but was rejected at that level. Support is seen near the 10-day moving average near 1.6673.

Momentum is positive as the MACD (moving average convergence divergence) index prints in positive territory. The RSI (relative strength index) on the other hand moved lower with price action reflecting accelerating negative momentum while printing near 58, which is on the upper end of the neutral range.

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