GBP/USD: Testing 3rd Touch Of A Descending Trendline

Technically, the Sterling has reached a crossroads as it finds an expected cluster of offers at the 3rd test of a descending trendline originating from Feb 8th’s supply imbalance. The acceptance just under this dynamic resistance is an encouraging sign as it’s the still pronounced bullish slope of the 25-HMA by NY 5pm as momentum-based intraday strategies keep a lid on the tepid USD demand seen. The consolidation near the highs has also allowed the slow stoch to come out of overbought conditions. Scanning through intermarket flows, and taking last Friday’s upward rotations as our guidance given the low levels of trading activity on Monday, we still can observe positive microflows in the DXY as the 25-HMA slope portrays, while it’s also quite encouraging to see the macroflows based on the 125-HMA slope (5-DMA) to officially turn higher as the thick green slope exhibits. One of the factors that may abate the demand imbalance of Pounds vs US Dollar is derived from capital flows, as both the micro and macroflows still show a bearish divergence (blue lines) with the price. For most of February, the 5-day correlation coefficient of the UK-US yield spread has acted as a reliable barometer to take the pulse on the pair’s valuation, that’s why one must pay attention to the current lagging. Overall, it’s a fairly balanced outlook, with cases to be made for either side. In favor of buy-side action is the current technicals and DXY weakness, while sellers’ thesis to short the market could be predicated on the UK-US yield spread divergence and the crucial trendline tested.