GBPUSD moves into primary uptrend, but there are signs of froth
GBPUSD Weekly Analysis
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The GBPUSD weekly has charted a higher trough followed by a higher peak. This puts the forex pair into an uptrend. The weekly RSI is on the bullish side of 50 (green rectangle). The longer it persists on this side, the greater the likelihood of further primary trend appreciation.
Daily Analysis Shows Overbought Condition
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GBPUSD's daily candlesticks are positioned in a bullish channel, between the upper blue and red bands. The red Bollinger bands have moved in opposite direction, denoting an expansion in cable volatility. This has flowed through to the daily RSI which has pushed above 80 and is overbought (blue rectangle).
It is unlikely that the RSI remains overbought for a sustained period, and normalisation is likely. However, given the bullish primary uptrend, corrections may very well set up a "dip in an uptrend" scenario.
Expanding Fixed Income Spread
Source: www.tradingview.com
The top chart shows the spread between the British 02-year gilt and the US 02-year note. The 2-year is a good proxy for monetary policy because short-term yields respond quickly to changes in the cost of capital. The spread is moving in a northeasterly direction, showing that the spread is expanding in favour of the British 02-year gilt.
The bottom chart shows GBPUSD. It is also moving in a northeasterly direction. I.e., there is a robust correlation between the fixed income spread and the GBPUSD. In this regard, we note that the BoE is expected to raise its official bank rate by 25 bps to 4.75% on Thursday, 22 June. This, after the Fed chose to pause last week.
The Core Inflation Aspect
Source: www.tradingview.com
UK core inflation is at 6.80% and US core inflation is at 5.3%. However, it is the trajectories which truly highlight the differences. UK core inflation is still heading upwards (left blue arrow), whilst US core inflation is heading downwards (right blue arrow). This connotes that the BoE may have to remain the more hawkish of the two central banks for some time to come. If so, this is likely to manifest in the fixed income spread and filter through to support GBPUSD.
Russell Shor
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
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