GBP/USD intermarket: watching US yields to play catch-up

Currently, GBP/USD is trading at 1.2783, down -0.23% on the day, having posted a daily high at 1.2843 and low at 1.2772.

GBP/USD remains in positive territory following the recent flash rally from 1.2513 to 1.2904 on the 17th April that squeezed the short bets down to size. PM May's call for a snap election has instilled confidence in the UK. Investor's outlooks rank Britain as a good investment despite the previous Brexit concerns and underlying risks to the UK economy depending on how the negotiations go with the troubled EU. "There is little doubt that May will have a stronger majority after the June 8 election. She will likely be in a better negotiating position vis a vis her domestic rivals and EU negotiators," explained analysts at Brown Brothers Harriman, adding, "it increases the chances that an agreement will be struck."  

Tracking EUR/GBP performace

• EUR/GBP poised for rangebound between 0.84 and 0.88 – Danske Bank

EUR/GBP was a telling play ahead of the French elections, R1/R2, and is a good indicator as to how the market is fairing the EU in comparison to Britain. EUR/GBP has been in a strong correction since the start of October from 0.9017 and price has targetted the 200 smoothed daily sma at 0.8302. Politics and economic fundamentals appear to be less concerning in Britain than the UK.

• US Dollar stays close to lows near 98.90

Meanwhile, Trump's promises of tax reforms have, until last week, been causing investors to look elsewhere and that too has boosted the pound. However, it has appeared that investors are banking on Trump delivering on his words and this week will be a key week for the greenback as Trump is due to announce his plans for tax reform. We also have durable goods and GDP Q1 first estimates as key drivers for the dollar this week. The UK will also reveal the preliminary GDP Q1 as a standoff between bulls and bears in cable this week. 

• US and UK initial estimates for Q1 GDP and Eurozone HICP in focus this week - BBH

US yields bottomed? 

US yields will be a major factor in the performance of the greenback. For today, they have been in a range of between 2.2730% - 2.3232% and moving to the downside and despite the hype over Fed rate hikes. CME's Fed watch came out with a June hike now at a 66% chance of a 25bp hike. Bloomberg's own model on the rate probabilities via Fed Funds Futures jumped from Friday's 50.2% to 66.5% today as well. So, it would appear that yields have some catching up to do. However, analysts at Brown Brothers Harriman explained that while US 10-year yields moved back above 2.20%, until they manage to get back and stay above 2.30%, it is not clear that the low is in place.  

GBP/USD levels

GBP/USD penetrated a key resistance area through the 200-day ma, the 1.2707 January high and the 1.2836 long term Fibonacci resistances. "The break looks directional and we will assume an upside bias above 1.2615 (200-day ma)," explained analysts at Commerzbank, adding, "we allow for further strength to the 55-week ma at 1.2986 if it were to rise above today’s high at 1.2930. First a minor consolidation lower should be seen, though with the 1.2705 February high being eyed."