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The Pound gains traction after solid retail sales report

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The Pound gains traction after solid retail sales report

The Pound continued to show resilience on Thursday after experiencing significant volatility on Wednesday as investors awaited the outcome of Bernanke’s testimony in front of the US House of Representatives.  The dovish stance of the Fed has allowed the interest rate differential between US and the UK to move in favor of the UK, driving up the sterling.  Thursday’s June UK retail sales also provided traction for sterling bulls.

UK’s June retail sales, showed strength and the first back to back increase in over a year. Retail sales increased 0.2% for a 2.2% year over year increase, which was in line with expectations.  The inflation component of the retail sales report was of concern as it printed at 1.7% in May which is the highest its been in over a year.  Although the Bank of England wants to see growth, inflation will restrict future accommodative policy.

The two-year yield differential which measures the difference between UK two year yields and US two year yields moved in favor of the UK, printing near 30 basis points which makes it more difficult to short the pound as investor would need to pay away interest for that privilege.

Sterling edged higher on Thursday, after holding support on Wednesday near the 10-day moving average seen near 1.5070.  Resistance is seen near the July highs at 1.5304.  Momentum is beginning to pick up as the MACD generated a buy signal on Wednesday as the spread (the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the spread.  The index moved from negative to positive territory confirming the buy signal.  The RSI broke higher showing increasing momentum, and is printing near 50 which is in the middle of the neutral range.

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