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Sterling Tumbles on Weak Inflation Data; RSI is Oversold

David Becker
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Sterling Tumbles on Weak Inflation Data; RSI is Oversold

Sterling has dropped through trend line support following the U.K. inflation data with Cable diving over 50 pips to a four-month low of 1.6634, and over 100 pips down on the high seen yesterday after BoE’s Carney said that the U.K. is over halfway through its recovery.

CPI fell to 1.6% year over year from 1.9% year over year in June, below the median forecast for 1.8% year over year. PPI input prices dove to a -7.3% year over year clip, and output prices dropped into negative territory for the first time this cycle, at -0.1% year over year. Following data last week showing a drop in average household incomes, to a negative reading in the including-bonus figure, the BoE will not be in any rush to hike interest rates.

U.K. yields have also dropped, and market expectations for the first BoE repo rate hike are likely to shift out to the end of Q1 or Q2 next year. The previous trend low at 1.6657 now marks resistance in Cable, while technically-minded bears will be looking for a close below the 200-day moving average at 1.6675 to affirm potential for 1.6500. The next level of target support for the currency pair are the March 2014 lows seen near 1.6450.

Momentum on the currency pair remains negative as the MACD (moving average convergence divergence) index printing in negative territory with a downward sloping trajectory. The MACD compares two moving average and then compares those moving averages to a smooth moving average of the spread. The RSI (relative strength index) which is a momentum oscillator that measures overbought and oversold levels, move lower with price action reflecting accelerating negative momentum while printing at 27, which is below the oversold trigger level and could foreshadow a correction.

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