GBP/USD - Bond yield spread favors USD, all eyes on UK inflation

Friday’s rally in the GBP/USD was short lived as the exchange rate fell back to 1.2965 - which is the 23.6% Fib R of Jan low - Aug high. The currency pair traded flat lined in Asia around 1.2965 levels. 

US-UK 10-yr yield spread breaks higher

The chart above shows a bullish break of the falling channel. It indicates the spread is likely widen further in favor of the US dollar. 

Focus on UK inflation

The consumer price index [CPI] is seen rising 2.7% y/y vs. previous month’s print of 2.6%. The core inflation is seen rising 2.5% y/y. 

The bond yield spread could narrow if the UK inflation beats estimates, thus leading to a fresh rally in the GBP/USD pair to 1.30 levels and above. 

On the other hand, a weaker-than-expected core CPI number would add credence to the bullish break on the US-UK 10-yr yield spread and open doors for a break below the 50-DMA support seen around 1.2935 levels. 

Later in the day, the focus would shift to the US data, which is expected to show the consumption as represented by the retail sales rose 0.4% in July as opposed to the 0.2% contraction seen in June. 

GBP/USD Technical Levels

A break above 1.30 [psychological level] would open doors for 1.3033 [10-DMA]. A violation there would indicate the pull back from the high of 1.3268 has ended. The next big hurdle stands at 1.3126 [July 18 high]. On the other hand, a breakdown of support at 1.2935 [50-DMA] could yield a sell-off to 1.29 [zero levels] and 1.2858 [100-DMA].