In terms of cyclical and structural factors, UK is leading the EZ, which eventually leads to higher UK 10year gilts than Europe. Since last year’s lows’ UK 10year yields rallies from 0.105% to 0.825% pre-Covid levels. Besides UK vaccination program is well ahead of Europe. Both these factors have been supporting the UK assets and the pound against Europe.
Source: FT
Spread: The United Kingdom 10 years/ German 10 years Bond
Source: http://www.worldgovernmentbonds.com
Currently, the spread is 113.5bps, which is equal to the September 2019 and November 2016 high. In FX, the EURGBP cross is trading at 0.8590slightly higher to November 2016 low at 0.8450.
FX: A decisive breakout above 0.8730 is needed to confirm the trend.
Since late February, EURGBP has been consolidating in a range between 0.8540-0.8730 levels with a higher RSI pattern. But the oscillator is still showing bearish divergence, hence a mixed pattern. A daily close above 0.8600 would confirm the short-term trend, but still selling on rallies preferred. Flipside, we continue to open an eye towards 0.8470 and 0.8400.
Data review:
ONS’s latest GDP reported weakening on the back of lockdowns and Brexit. According to the official release, UK GDP fell 2.9% in January, following a growth of 1.2% in December 2020. Restrictions were in place to a varying degree across all four nations of the UK during January.
We learned from the latest GDP report that the services sector acted as the main drag on growth in January, decreasing by 3.5% as restrictions on activity were reintroduced in response to the coronavirus (COVID-19) pandemic.
Data wise, we focus on the Bank of England’s policy meeting on Thursday. We don’t expect either BoE or FOMC to change the rates. Likewise, ECB expects BoE will keep its dovish stance.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
What is your Technical View?
Do you have a different idea? Please leave us a comment and get an answer from our professional analysts