GBP/USD Trades Lower On Poor Data; 1.35 Could Be the Next Target

Summary:

Poor data from the retail and manufacturing sectors put the GBP/USD under pressure, and could force the BoE to act according to CIBC Markets.

The Pound took a hammering this Friday due to a sharp drop in manufacturing business activity for January 2021. The GBP/USD is down 0.54% as the effect of the national lockdown starts to show.

Data showed that the Flash Manufacturing Purchasing Managers Index dropped from 57.5 in December to 52.9 in January. This was also below the market expectation of 53.5.

Also pressurizing the GBP/USD on the day was the fall in retail sales, as UK retailers found it difficult to rev up their stores after the November 2020 lockdown. UK retail sales showed a 0.3% rise, a far cry from the 1.4% that the markets had expected.

CIBC Markets has noted the possibility of a double-dip recession, and further challenges to the UK economy may force the BoE into a 10 bps cut. Recall that the BoE Chief Andrew Bailey had dismissed the notion of the bank sending rates into negative territory, saying it would hurt UK banks.

Technical Levels to Watch

Thursday’s attempt by the GBP/USD to breach the 1.37025 resistance has been beaten back by sellers. The immediate downside target now lies at 1.36117. A breakdown of this area opens the door towards 1.35134. 1.34765 and 1.33951 line up as additional targets to the south. This move would be in line with the expected resolution of the rising wedge pattern on the daily chart.

Any recovery on the pair will first retest the 1.37025 resistance, with 1.37916 lining up as a potential resistance target. This move is expected to invalidate the rising wedge which has formed on the daily chart.