GBP/USD retreats towards 1.3500 as Brexit, yield favor bears ahead of UK/US PMIs

• GBP/USD refreshes intraday low, extends pullback from two-month top.
• Fed Minutes, ADP Employment Change fuelled yields, USD.
• EU takes multiple Brexit-linked sites offline, UK-France jostle over immigration.
• UK PM Johnson hints at easing covid restrictions over travel to England, British businesses see record inflation.

GBP/USD consolidates recent losses around a two-month top, refreshing intraday low to 1.3545 during Thursday’s Asians session.

The cable pair took a U-turn from highest levels since early November the previous day after the US Federal Open Market Committee (FOMC) Meeting Minutes conveyed hawkish bias of the policymakers, suggesting a faster rate-hike and plans to discuss balance-sheet normalization.

US ADP Employment Change for December, up 807K versus 400K expected, also backed the hawkish FOMC Minutes, which propelled the US bond yields and portrayed an 80% chance of Fed rate hike in March per Fed interest rate futures.

In addition to the Fed-linked chatters and market reaction, fears of the South African covid variant, Omicron, also weighed on the market’s risk appetite, as well as the GBP/USD prices. Although global policymakers tried not to scream on record covid infections, by citing scientific studies terming Omicron as a mild covid strain, findings of another virus variant and strain on multiple medical systems highlighted the COVID-19 woes. It’s worth noting that the virus cases are doubling faster and the fresh virus version, founded by France, is said to spread more widely than Omicron.

At home, the UK reported 194,747 daily covid cases, easing from the previous day’s record top of more than 218,000 infections. The same should have favored UK PM Boris Johnson to say, “I can announce that in England from 4:00 am on Friday we will be scrapping the pre-departure test, which discourages many from traveling for fear of being trapped overseas and incurring significant extra expense.” On the same line was the news from Telegraph saying, “British health officials have made plans to limit PCR tests to symptomatic people allowing asymptomatic Britons to return to work faster.”

Elsewhere, the European Union (EU) took down multiple Brexit-linked sites, including the leave.eu, while marking the latest spark with the UK. Additionally, news of the British-France tussles over immigration also portrayed Brexit woes.

However, hopes of government support to the London, due to Brexit-linked losses to the financial hub, join the positive progress on the US-UK Brexit trade talks to favor GBP/USD bulls.

Amid these plays, the US 10-year Treasury yields jumped to the highest level since April 2021 by the end of Wednesday’s North American session, up 3.4 basis points (bps) to 1.70%, which in turn drowned the Wall Street benchmark. Though, the recent pause in the US bond yields allowed S&P 500 Futures to print mild gains around 4,700.

That said, the GBP/USD pair may remain pressured amid hawkish hopes from the Fed. Though, today’s UK Services PMI for December, expected to confirm initial readings of 53.2, will be important after the Manufacturing PMI jumped. Also crucial will be monthly prints of the US Good Trade Balance and ISM Services PMI for December, as well as weekly prints of US Jobless Claims.

Technical analysis

With nearly overbought RSI conditions backing the GBP/USD pullback from a two-month-old horizontal hurdle surrounding 1.3600, the pair sellers may aim to retest November’s high near 1.3510. However, any further weakness will be challenged by a 13-day-old support line near 1.3505, as well as by the 1.3500 threshold.