The pound has risen to a fresh 5-year high today on the back of another strong PMI reading. The all-important service sector PMI rose to its highest level in 2014 so far in April, and this data suggests that Q2 had a strong start after stellar growth in the first quarter.
This data has coincided with the OECD’s latest global growth forecasts; while US, China and Japan’s growth forecasts were all cut, Europe saw growth forecasts revised higher. The UK is expected to see the strongest growth out of the G7 this year.
All of this positive growth data has a consequence – how long can the Bank of England keep rates at these super low levels? This is a difficult question to answer, while on the surface the positive tone to data suggests that the BOE should consider hiking sooner rather than later.
On the other hand, we could be in a sweet spot for the UK as price pressures remain very low. Thus, although the employment component of the service sector rose to its highest level in the survey’s history, the pricing component remained stable.
While GBP may not get a helping hand from the BOE on its quest to 1.70 and beyond, it is benefiting from two factors:
- the better tone to economic data
- the weakness in the USD.
This has helped GBP/USD to make a fresh 5-year high on Monday.
The Yield Effect:
At the start of this year, sterling was trending higher while the spread between UK and US yields was falling. Thus, the pound was strengthening without the support of the yield effect. This has changed in the last few sessions as the US-UK yield spread has jumped back into positive territory with the UK 10-year government bond yield outpacing the US Treasury yield.
While it is unusual for the spread to play catch up with the currency (it can be the other way round), if the yield spread continues to recover this could help GBPUSD jump above 1.70 in the medium-term. (see chart below).
The Technical Picture:
While the fundamental back-drop is supportive of GBPUSD, the technical picture is also looking strong. The trending indicators remain in bullish territory and the pattern of higher highs and higher lows all suggest there is scope for a push towards 1.70 and then to the 1.7043 - August 2009 high.
If we can get above here the next key resistance level is 1.7332 – the 50% retracement of the November 2007 – January 2009 bear trade.
The daily RSI is above 70, and is thus in overbought territory, however, we think any downside could be limited due to the current bout of dollar weakness. Key support lies at 1.6763 – the April 23rd low.
Source: Bloomberg & Forex.com