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Sterling Traders Lower After PMI Report

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Sterling Traders Lower After PMI Report

The Pound continued to weaken on Tuesday after consolidating at the beginning of the week and declining nearly 5 big figures since the beginning of June. Strength in US yields and a weaker yield differential have eroded the value of sterling, driving down the GBPUSD currency pair by more than 3%.

On Tuesday, UK construction PMI was reported at 51.0 vs. 51.2 expected and 50.8 in May.  Recent economic data in the UK has come in slightly firmer.  Even if new Bank of England Governor Carney comes in with a more accommodative stance, it will take time to convince the MPC to change policy as  former Governor King was routinely outvoted by his colleagues in his efforts to add to BOE gilt purchases.  The Bank of England meets this coming Thursday July 4, and is unlikely to make any significant changes to their policy.

The UK-US 10-year yield differential has remained stable slightly below zero which should slightly favor the US dollar and which has been one of the reasons investors have purchased dollars in favor of pounds during the past month.  As interest rates move in favor of a currency it becomes more expensive to short that currency as an investor would need to pay away interest for that right.

The GBPUSD currency pair is approaching support levels near 1.51, which coincides with an upward sloping trend line that connects the March lows and the May lows.  Resistance is seen near the 10-day moving average near 1.5340.  Momentum is moving lower with the MACD (moving average convergence divergence index) generating a sell signal in mid-June as the index moved from positive to negative territory.  The RSI (relative strength index) is grinding lower printing near 36 which is on the low end of the neutral range.

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