GBP/USD - Rising risk reversals contradict widening 10Y US-UK yield spread

• GBP/USD risk reversals show GBP calls are in demand.
• 10Y US-UK yield spread hits 9-month highs, favors USD.

Currently, GBP/USD trades at 1.3812 - down more than 100 pips from the previous day's high of 1.3943. The long upper shadow of yesterday's candle could be read as a sign of bull market exhaustion.

However, one-month 25 delta risk reversals gauge rose to a four-month high of 0.30 yesterday, which indicates the dealers are still adding a premium for GBP calls.

While the risk reversals highlight the bullish sentiment on the underlying (GBP), the yield differential tells a different story. The spread between the yield on the 10-year US treasury and its UK counterpart rose in the USD-positive manner to 127 basis points; the highest level since mid-April. Clearly, the rally in GBP/USD looks unjustified considering the widening US-UK yield differential.

That said, the British Pound may continue to defy the unfavorable yield differential if the talk of the second Brexit referendum gathers pace.  

GBP/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik writes, " The short-term picture for the pair is bullish, as in the 4 hours chart, the price bounced sharply after struggling with a bullish 20 SMA, holding near the mentioned high by the end of the US session. Technical indicators in the mentioned chart, are also supporting additional gains ahead with the RSI indicator heading higher within overbought territory and the Momentum also regaining the upside bouncing from its 100 level. Speculative interest seems determinate to test the 1.4000 threshold a possible bullish target for the upcoming session, should the greenback remain under pressure."

Support levels: 1.3835 1.3800 1.3770 

Resistance levels: 1.3895 1.3920 1.3960