GBP/USD - 2Y US-UK remains elevated ahead of the BOE, focus on EUR/GBP

• 2-year US-UK bond yield differential remains elevated even though BOE is seen raising rates this week
• EUR/GBP sell-off could offer cap losses in GBP/USD

GBP/USD trimmed losses on Friday, largely on the back of the Catalan-led sell-off in the EUR/GBP. Cable strengthened moderately to 1.3140 levels in the Asian session today.

BOE likely to raise rates

While the Bank of England is seen raising rates by 25 basis points on Nov. 2, the Bloomberg survey says three out of nine policy makers are likely to vote against the move. This could be the reason for the resilience in the two-year US-UK yield spread/difference, which currently stands at 114 basis points (bps), the highest level since early September.

Thus, the British Pound is unlikely to strengthen significantly while heading into the Thursday's BOE rate decision.

However, the downside could be capped by a potential sell-off in the EUR/GBP pair. The two-year UK gilts yield more than 100 bps over their German counterparts. Plus, Catalan crisis boosts UK's appeal as regional safe haven. The resulting drop in EUR/GBP (increased demand for GBP) could offer support to Cable.

GBP/USD Technical Levels

 A break above 1.3162 (Fri's high) would open doors for a possible cut through 1.3187 (50-DMA) and a rally to 1.3279 (previous day's high). On the other hand, a break below 1.3060 (100-DMA) could yield a sell-off to 1.3027 (Oct 6 low) and 1.30 (psychological level).