Soft inflation caps sterling upside

The Pound gain traction on the heels of a weakening dollar as the Federal Reserve prepared itself for a two day meeting that ends on Wednesday. Sunday’s announcement that former Treasury Secretary Lawrence Summers had withdrew his name from consideration as the next Federal Reserve Chairman pressured US yields driving the interest rate differential in favor of the pound.  Soft inflation data in the UK helped ease tensions on the pound, as the central bank would have room to allow rates to remain low in the wake of tame price increases.

The yield differential in the 10-year space has lagged behind the currency pair.  Despite a surge in the GBPUSD the yield differential has remained near 20 basis points, as stronger than expected UK data has failed to lift the differential.

UK inflation for August came in softer than expected.  UK inflation measured by the consumer prices index fell to 2.7% in the year to August, from 2.8% in July.  This means that prices are still rising faster than wages, which rose by 1.0% on average over the same period.

Inflation as measured by the retail prices index rose to 3.3% in August from 3.1% in July. Despite Carney’s efforts at forward guidance, gilt yields have risen dramatically in recent months as the real sector data came in firmer than expected.

The GBPUSD consolidated its recent gains as the trend higher is still intact.  Momentum on the currency pair is strong with the MACD (moving average convergence divergence) index increasing with a positive trajectory.  The MACD generated a buy signal in the first week of September as the differential (the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the differential. A warning signal is the RSI (relative strength index) printing at 74, which is above the overbought trigger level of 70.