GBP/USD retreats towards 1.3400 as Brexit, coronavirus woes escalate, PMIs in focus

• GBP/USD stays pressured for the second consecutive day, fades bounce off intraday low.
• UK ports fear unfair Brexit advantage, Stormont collapse looms.
• UK PM Johnson fears considerable pressure on medical system as cases jump, US infections also jump.
• Final readings of UK Manufacturing PMI, Yields may entertain traders ahead of US ISM Manufacturing PMI.

GBP/USD remains on the back foot around 1.3473, down 0.07% intraday during the second loss-making day ahead of Tuesday’s London open.

While firmer US Treasury yields dragged the Cable pair from a two-month-high the previous day, the coronavirus fears in the UK and Brexit woes exert additional downside pressure on the pair. That said, the market’s indecision ahead of the second-tier data from Britain and the US seems to challenge the GBP/USD downside of late.

The US Treasury yields jumped to the six-week top for 30-year, 20-year, 10-year and 5-year notes on Monday as fears concerning the South African covid variant joined firmer expectations of the US Federal Reserve’s (Fed) faster rate hike in 2022.

With a sustained jump in the coronavirus cases at home, recently rose by around 158,000 infections, UK Prime Minister (PM) Boris Johnson warned that the National Health Services (NFS) will be under substantial strain in the upcoming weeks. On the other hand, Reuters’ tally mentioned, “COVID worries have been front and center once again for investors since the start of the holiday season. The number of new COVID-19 cases has doubled in the last seven days to an average of 418,000 a day, mostly attributed to the highly transmissible but milder Omicron variant,” according to a Reuters tally.

It should be noted that a jump in the money market bets for the Fed’s three rate hikes in 2022 and stronger US inflation expectations also exerted additional downside pressure on the GBP/USD prices. “Money markets have fully priced in a first U.S. rate increase by May, and two more by the end of 2022,” said Reuters. Further, US inflation expectations, as per the 10-Year Breakeven Inflation Rate numbers from the Federal Reserve Bank of St. Louis (FRED), jumped to a fresh high in six weeks to portray further prices pressure ahead, allowing Fed hawks to keep controls.

On a different page, some of the new Brexit rules are active from the 2022 start and hence challenge the movement of goods, which in turn tests the strained supply chain. Also, the Financial Times (FT) said, “Brexit customs checks later this year risk undermining the commercial ‘level playing field’ for UK regional ports, the body representing some of the country’s largest port operators has warned.” Some of the pro-Brexit updates also cheered freedom from foreign takeovers. Even so, the Northern Ireland (NI) issue flashes a grave sign of Brexit progress. In this regard, the Times said, “Boris Johnson has been told it is “inevitable” that Northern Ireland’s fragile power-sharing government will collapse if he fails to solve the dispute with the EU over the implementation of the border protocol.”

Moving on, the final reading of the UK Manufacturing PMI for December, expected to confirm 57.6 figure, will precede the US ISM Manufacturing PMI for December, forecast 60.2 versus 61.1 prior figures, to direct short-term GBP/USD moves.

Read: ISM Manufacturing PMI Preview: Low expectations in three figures open door to dollar upswing

Technical analysis

Although the GBP/USD prices grind between the 50-DMA and 100-DMA, the RSI line suggests that the bulls are tired and hence short-term declines toward the 50-DMA level surrounding 1.3400 can’t be ruled out. However, the 38.2% Fibonacci retracement (Fibo.) level of the October-December fall adds strength to the stated support near 1.3400 and challenges the GBP/USD bears.

On the flip side, 50% Fibo. near 1.3500 round figure will restrict short-term upside moves of the GBP/USD prices ahead of the 100-DMA level of 1.3560.