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Sterling Breaks Out; Focus Turns to BoE

David Becker
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www.iforex.com
Sterling Breaks Out; Focus Turns to BoE

Cable moved higher on Tuesday, following a stronger than expected PMI services number. Strong gains in the UK economy have been driving yields higher, which is not the case in the US. Despite Monday’s stronger than expected ISM services PMI, US yields continued to trade under pressure. Gilts were higher by 4 basis points on the trading session, which is also approximately 6 basis points higher than US 10-year yields.

The U.K. April Markit services PMI beat economists’ expectations at 58.7, a nine-month high and up from 57.6. The median forecast had been for an unchanged reading.The composite PMI for the U.K. lifted to 59.4 from 58.2 in March, returning to its highest level since November and indicating that the U.K.’s G7-topping pace of economic growth is maintaining momentum.

Markit estimates that the data points to GDP growth of at least 0.8% q/q, which would match the official preliminary Q1 growth estimate. The breakdown in the survey data were encouraging, with private sector businesses hiring staff at the fastest rate on the PMI survey’s record, while prices pressures still remain subdued.

Sterling easily sliced through resistance levels and hit a new high for the move on route to weekly resistance near 2.7040. Support on cable is seen near the 10-day moving average at 1.6850. Momentum is strong 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 index moved from negative to positive territory confirming the buy signal. The relative strength index (RSI) moved higher with price action reflecting accelerating positive momentum. One caveat is that the RSI is now printing at 71, which is above the overbought trigger level of 70 and could foreshadow an impending correction.

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