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The Pound moves toward support levels

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The Pound moves toward support levels

Sterling traded under pressure for most of Tuesday trading session as strong yields in the US and a negative surprise in UK industrial production forced the pound lower toward support levels.  A new theme of dovishness has washed through perceptions of how the MPC will handle rates with new governor Mark Carney taking over yields have been tempered.

The UK’s industrial production report surprised market participants.  Given the new more accommodative Bank of England, ushered in by the ascension of Carney, the BoE’s policy framework will likely be altered over the next month with two new deputies in the coming in.  Industrial output in May was unchanged month over month, missing expectations of a consensus that forecast a 0.2% gain.  The more significant disappointment was with the 0.8% slide in manufacturing.  The market had expected a 0.3% increase.  This was the largest decline since the start of the year and warns economists may have to revise down second quarter GDP estimates.  April industrial output was also revised lower to show a 0.1% decline instead of a gain of the same magnitude.

The 10-year yield differential has decline in favor of the US for the first time since April of 2010.  The favorable yield differential is driving investors into the dollar and out of sterling. This phenomenon is forcing the GBPUSD lower testing horizontal support levels near 1.4875.  A close below this level would likely lead to a test of monthly support near the 2010 lows at 1.4200.

With the 10-day moving average recently crossing the 50-day moving average a short term trend is now considered in place. Momentum continues to favor a lower pound with the MACD printing at its lowest levels over the past 6-months.  The only warning sign is the RSI printing at 31, close to the oversold trigger level of 30.

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