The GBP/USD pair made a bearish breakout in the past few days. 

Bullish view

• Set a buy limit at 1.2600 and add a take-profit at 1.2700.
• Add a stop-loss at 1.2550.
• Timeline: 1-2 days.

Bearish view

• Set a sell-stop at 1.2600 and a take-profit at 1.2500.
• Add a stop-loss at 1.2700.

The GBP/USD exchange rate retreated to its lowest level since December 25th as American and British bond yields bounced back. The pair dropped to a low of 1.2612, lower than last month’s high of 1.2826.

UK and US bond yields rise

The GBP/USD pair dropped as traders embraced a risk-on sentiment on the first trading day of the year. This view was seen in the performance of the bond and stock market. In the US, the ten-year bond yields rose to 3.94% while the 30-year rose to 4.08%. Similarly, in the UK, the 10-year gilt yields rose to 3.64%.

American stocks also retreated, with the S&P 500 and Nasdaq 100 indices falling by over 25 and 215 points, respectively. The US dollar index jumped by over 80 basis points. This performance is likely because of the rising inflation fears because of the crisis at the Red Sea.

In a Tuesday statement, Maersk said it was pausing its transit through the Red Sea until further notice. This happened after Houthi rebels attacked one of its vessels in the region. Other shipping giants like MSC and Hapag-Lloyd have also paused transit through the route.

As a result, these companies are using a longer route that involves going around the Cape of Good Hope in South Africa. The implication of this is that it could lead to substantial inflation in the coming months. As a result, this inflation could disrupt plans for rate cuts by the Fed and other central banks.

The GBP/USD pair also retreated after the weak manufacturing PMI numbers from the UK and the US. According to S&P Global, the UK PMI figure retreated to 46.2 while in the US, it dropped to 47.9. A PMI figure of less than 50 is a sign of contraction.

Looking ahead, the next key event to watch will be the upcoming FOMC minutes. These minutes will provide more information about the last monetary policy meeting. In it, the bank left interest rates unchanged between 5.25% and 5.50%.

GBP/USD technical analysis

The GBP/USD pair made a bearish breakout in the past few days. It has retreated to 1.2634, its lowest level since December 21st. Along the way, the pair has dropped below the 50-period and 25-period moving averages. It is also hovering at the lowest swing on December 21st.

The pair’s Relative Strength Index (RSI) and the Stochastic Oscillator have pointed downwards. Also, it remains slightly above the lower side of the ascending channel. Therefore, the pair will likely retest the support at 1.2600 and then bounce back, potentially to 1.2700.

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