GBP/USD - 10Y US-UK yield spread at 10-month high, correction on the cards?

GBP dropped on Friday on weak UK retail sales release.
High levels of GBP/USD unjustified as the yield differential rises.
Cable could test 1.37 on weak wage growth numbers.

Omkar Godbole FXStreet Contributor

The GBP/USD turned lower from the high of 1.3945 and fell to 1.3839 on Friday on the back of a disappointing UK retail sales release.

The currency pair opened higher at 1.3894 in Asia and was last seen trading on the back foot at 1.3870 levels. Despite, the pullback from 1.3945, the overall uptrend remains intact.

However, the rising yield differential indicates the elevated exchange rate is unjustified. For instance, the 10-year US-UK bond yield spread/differential rose to 130 basis points (bps); the highest level since mid-March, 2017.

Focus on UK wage growth release

The UK employment and wage growth data are scheduled for release this Wednesday. Kathy Lien from BK Asset Management writes, "investors will be eager to see if wage growth also weakened. The prospect of softer wage data (after last month's strong rise) could push the GBP/USD down to 1.37."

Meanwhile, the appetite for the US dollars could be influenced by US government shut down saga and rising Treasury yields.

GBP/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik writes, "In the daily chart, the pair remains well above a bullish 20 SMA, while technical indicators have lost their upward strength, with the Momentum consolidating within positive territory and the RSI retreating within overbought territory, limiting the upward potential but far enough to confirm a downward movement ahead. In the 4 hours chart, however, technical indicators head sharply lower, aiming to cross their mid-lines, while the pair settled around its 20 SMA. Nevertheless, the pair could gap higher at the weekly opening on dollar's weakness, following weekend news announcing a US government shutdown."

Support levels: 1.3800 1.3770 1.3735

Resistance levels: 1.3865 1.3900 1.3945

	TREND INDEX	OB/OS INDEX	VOLATILY INDEX
15M	Bearish	Neutral	Low
1H	Bearish	Neutral	Low
4H	Bearish	Neutral	Shrinking
1D	Bullish	Overbought	High
1W		Overbought	Expanding
Updated Jan 22, 03:45 GMT

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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