GBP/USD retreats after weak UK GDP data and rising US yields

The GBP/USD declined sharply on Friday after the relatively weak economic numbers from the UK. The pair fell by more than 0.50% to 1.3925, the lowest level since Wednesday this week. 

UK economy contracted sharply in Q4

The UK economy weakened faster than expected in the fourth quarter, according to the Office of National Statistics (ONS). 

The final figure showed that the economy contracted by an annual rate of 9.2% in the fourth quarter. This was a deeper contraction than the median estimate of a 7.8% decline. 

In January, the economy also contracted by 2.9% as the government implemented the third national lockdown to stem the new variant of the virus. This contraction was better than the median estimate of a 4.9% contraction. 

Meanwhile, other specific numbers were worse than expected. Manufacturing production declined by 5.9% in January after falling by 2.5% in December. Similarly, industrial production fell by 1.5% after rising by 1.2% in December. Further, the country’s exports declined mostly because of trade restrictions brought by Brexit.

However, on a positive note, the construction sector did better than what was expected. It rose by 0.9% in January leading to a 3% annual contraction. Last week, data by Markit showed that the construction PMI continued to increase in February. The sector has been relatively strong recently, helped by the recent tax incentives by the government. 

Still, there is a possibility that the GBP/USD price will rebound in the near term. For one, the government has already intensified its vaccination process. It has vaccinated more than 15 million people and the trend will continue. Also, the Bank of England (BOE) has almost ruled out slashing interest rates to the negative zone. The bank will meet and leave its pandemic response tools unchanged. 

Meanwhile, the GBP/USD is falling even as US Treasury yields continue to rise. The 10-year government bond yield rose sharply to 1.59% today after Joe Biden signed the $1.9 trillion stimulus package. 

GBP/USD outlook

On the three-hour chart, we see that the GBP/USD nosedived today as forex traders reflected on the UK GDP numbers. It dropped to 1.3913, which is a steep decline from the day’s high of 1.400. The price is along the lower line of the ascending channel shown in purple. 

It is also slightly above the second support level of the Andrews Pitchfork tool and along the 50% Fibonacci retracement level. Therefore, a complete bearish reversal will be confirmed if the price moves below the 50% retracement at 1.3900.