GBP/USD likely to test 1.58 post the US GDP data

US 10-year yield dip ahead of GDP report

As I write, the Ten-year treasury yield in the US has declined to 2.298%. The two-year note yield has also declined to 0.528%.

The slight decline in the yields at the short-end and the long-end of the market curve indicates that the markets are pricing-in a slowdown in the Q3 US GDP to 3.3%, from the previous print of 3.5%.

UK Gilt yields may stabilize as rate hike delay already priced-in

Meanwhile, the Ten-year UK Gilt yield has weakened to 2.026% from the day’s high of 2.045%. The yields fell after the Bank of England governor Mike Carney, while addressing the Treasury Select Committee, expressed a high possibility of inflation falling below 1%.

Moreover, the concerns expressed by governor Carney and other BOE officials today have already been priced-in by the markets after the dovish quarterly inflation report released earlier this month. Hence, the fall in the Gilt yields is likely to be temporary.

US Ten-year yield likely to breakout from the trading range

• The US Ten-year yield has been restricted in a range of 2.4% to 2.27% since Oct 29.

• The range has persisted since then, despite the release of the monthly jobs report, US CPI data and Federal Reserve minutes (Fed).

• However, the yields are more likely to break out of its trading range through the lower end if the US GDP estimate prints lower than the market expectation of 3.3%.

• In such a case, the ten-year yield can extend the fall to 2.22%.
  

•  Moreover, an upside breakout from the range is unlikely, as it would take a surprisingly strong US GDP number to push the ten-year yield in the US closer to 2.4%.

• Thus, the likelihood of the ten-year yield either staying mute around 2.3-2.32% or falling below 2.7% is higher.

Pound set to gain

• Given the action in the UK and US benchmark bond yields, the yield spread is more likely to tilt in favor of the British Pound post the US GDP data.

• Technically, the GBP/USD pair appears poised to test 1.5730-1.5740 levels after having bounced-off repeatedly from 1.5620 levels in the past few sessions.

• A break above 1.5740 shall open doors for a technical target of 1.5880 levels on the hourly chart.

• Even if the US GDP prints in-line with the expectation or slightly higher than expected, the weakness in the GBP/USD pair is likely to be restricted around 1.5620 levels.