GBP/USD may drop as US dollar strengthens. Economic outlook differs: US strong, UK weak. Key data includes PMIs. Technicals bearish, target 1.2595.

Bearish view

• Sell the GBP/USD pair and set a take-profit at 1.2595.
• Add a stop-loss at 1.2745.
• Timeline: 1-2 days.

Bullish view

• Set a buy-stop at 1.2675 and a take-profit at 1.2750.
• Add a stop-loss at 1.2600.

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The GBP/USD pair made a bearish breakout as the US dollar strength resumed. The pair retreated to 1.2667 as its attempt to bounce back faded at 1.2746. This retreat was in line with the overall USD rally as investors assess the next actions by central banks.

UK and US PMIs ahead

The US dollar continued rising as investors predicted that the US is in better shape than other countries. Recent economic numbers showed that the economy was doing well, with the unemployment rate sitting at 3.7%. Inflation stands at 3.4% while consumer spending has been relatively strong.

Also, there are signs that consumer confidence has continued rising in the past few months. Data by the University of Michigan revealed that confidence jumped to its highest point in over two years. This is notable since consumer spending is the most important part of the American economy. Highly confident consumers spend more money, growing the economy.

The picture is different in the UK, where data showed that retail spending crashed in December as inflation bounced back. Retail sales plunged by more than 3% in December as inflation rose to 4%, double the Bank of England’s target.

Therefore, there are signs that the British economy will remain under pressure in the coming months. More rate hikes by the BoE will make the economy worse while failure to act will likely spur inflation.

The key data to watch on Wednesday will be the flash manufacturing and services PMI numbers. Economists polled by Reuters expect the report to show that the manufacturing PMI figure improved slightly to 46.7 in January while services rose to 53.5.

S&P Global will also release the flash manufacturing and services PMI report for the US. Like in the UK, estimates are that the manufacturing figure remained in the red while the services report moved to 51.0.

GBP/USD technical analysis

The GBP/USD pair made a bearish breakout on January 16th and moved below the lower side of the rising wedge pattern. Its recent attempts to rebound found a strong resistance at 1.2746, its highest point on Monday. It remains below the 50-period moving average. The pair has also dropped below the key point at 1.2731, the highest point on November 29th.

Therefore, the pair will likely continue falling as sellers target the next support at 1.2595, the lowest point on January 17th. A break below that level will see it move to the reference point at 1.2500.

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