GBP/USD - Yield differential at critical levels ahead of Services PMI numbers

The offered tone around the US dollar strengthened in Asia on Fed leadership talk, pushing the GBP/USD pair to a high of 1.3274.

Yield differential at critical level

The US-UK 10-year bond yield spread currently stands at 96 basis points. The chart above shows bearish head and shoulders reversal was confirmed on September 14. The spread narrowed to 88 basis points on September 25. No wonder, the GBP/USD rose to 1.36 levels.

Over the last few days, the spike in the Treasury yields, saw the spread re-test head and shoulders neckline.  The Fed leadership talk weighed over the treasury yields yesterday, thus the spread fell back to 96 basis points.

The failure at the neckline resistance means the spread is positioned in favor of GBP ahead of the UK services PMI and US ISM non-manufacturing PMI release.

UK Services PMI is due at  0830GMT

UK services PMI is expected to show the pace of expansion in the activity remained unchanged in September at 53.2.

US ISM non-manufacturing is due at 1400 GMT

Kathy Lien from BK Asset Management writes, " US ISM non-manufacturing number is more important that the ADP as "the employment component of the report has a stronger correlation with non-farm payrolls so we'll be watching that closely as it could erase or exacerbate the market's reaction to NFP."

The yield spread could narrow, leading to GBP/USD rally if the UK services PMI beats estimates, while the US ISM non-manufacturing signals a sharp slowdown in the activity. Later in the day, comments from Fed's Yellen could influence the USD demand.  

GBP/USD Outlook

GBP/USD is seen falling below 1.32 if the UK services PMI misses estimates. Kathy Lien from BK Asset Management writes, "with retail sales rising strongly in August and consumer confidence increasing, we may actually see an improvement in the service sector", in which case Sterling could run into offers around 1.3343 [September 28 low].