The exchange rate of the GBP/USD pair dropped to 1.2625, its lowest point since January 5th as the US dollar index (DXY) jumped.

Bearish view

• Sell the GBP/USD pair and set a take-profit at 1.2500.
• Add a stop-loss at 1.2700.
• Timeline: 1-2 days.

Bullish view

• Set a buy-stop at 1.2635 and a take-profit at 1.2725.
• Add a stop-loss at 1.2550.

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The GBP/USD pair made a bearish breakout as traders reacted to the hawkish Fed statements and the rising bond yields. The exchange rate dropped to 1.2625, its lowest point since January 5th as the US dollar index (DXY) jumped.

Higher interest rates for longer

The GBP/USD pair retreated as the US dollar index jumped by more than 1% to $103.12, its highest point in over a month. This price action happened after Christopher Waller, a Fed governor, said that there was no need to hurry on rate cuts. He argued that the economy was doing well, with the unemployment rate remaining at 3.7%.

Inflation, on the other hand, has been quite sticky and the trend could continue. Data published last week showed that the headline Consumer Price Index (CPI) rose from 3.2% in November to 3.4% in December. Core inflation rose to 3.8%, higher than what analysts were expecting.

The bond market is showing signs that the first rate cut will not happen in March as was widely expected. Data shows that the 10-year bond yield rose to 4.075% while the 30-year yield surged to 4.31%.

The pair also retreated as investors embraced a risk-off sentiment as geopolitical issues continued. There is a growing risk that the crisis in the Middle East will escalate, leading to higher energy and transportation costs.

The GBP/USD pair also retreated after the latest UK jobs numbers. According to the Office of National Statistics (ONS), the unemployment rate retreated to 4.2% in November while the average earnings index with bonuses rose by 6.5%.

Looking ahead, the pair will react to the upcoming UK inflation and US retail sales numbers. Economists expect the data to show that the headline CPI rose by 3.8% in December as the core CPI rose to 4.9%. In the US, economists expect the report to show that retail sales rose by 0.4% in December while core sales jumped by 0.2%.

GBP/USD technical analysis

The GBP/USD exchange rate made a bearish breakout on Tuesday as the US dollar index jumped. On the 4H chart, the breakout happened after it had formed a rising wedge pattern, which is a popular reversal sign. It has also moved below the 50-period moving average while the Relative Strength Index (RSI) moved to the oversold level.

The pair is also hovering near the key support at 1.2613, the lowest swing on January 2nd. Therefore, the pair will likely continue falling as sellers target the key psychological point at 1.2500.

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