Forex Market: GBP/USD retreats for a third straight day on dismal UK retail sales data, elevated US-China tensions

GBP/USD continued to slide on Friday, as the Sterling was pressured by the latest string of somber macro data coming from the United Kingdom, while demand for traditional safe haven currencies such as the US Dollar increased due to escalating tensions between Beijing and Washington.

Earlier on Friday, UK retail sales were reported to have plummeted 18.1% in April compared to March, or at the steepest monthly rate on record. April retail sales were 22.6% lower compared to April 2019, following a 5.8% year-on-year drop in March. At the same time, retail sales, excluding fuel, decreased 15.2% in April compared to March, also at the sharpest monthly rate on record, UK’s Office for National Statistics reported.

The latest data along with dismal UK CPI inflation numbers reported earlier this week, added to the prospects of negative interest rates being introduced by Bank of England to support the pandemic-hit economy. More than 43,000 people in the UK have so far died because of the COVID-19 illness, while the number of confirmed cases surpassed 252,000, which has made the country the most severely affected one in Europe.

“With the prospects of negative rates fully on the market’s radar and in part priced in by the end of this year and for 2021, the next main hurdle for GBP should be the negative news-flow on the trade negotiations and likely no extension of the UK-EU transition period,” ING analysts wrote in a note to clients.

Meanwhile, on the geopolitical front, US President Trump warned of a “very strong” US reaction to new Chinese national security legislation on Hong Kong, which is seen as an attempt to increase China’s control over the former British colony and might once again trigger pro-democracy protests. These developments contributed to the risk-off mood on global markets.

As of 11:38 GMT on Friday GBP/USD was losing 0.28% to trade at 1.2189, after touching an intraday low of 1.2162 during the late phase of the European session.

In terms of economic calendar, no relevant macroeconomic reports or other events are scheduled for today.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 22.0 basis points (0.220%) as of 10:15 GMT on Friday. It has remained close to the one-week high of May 21st.

The yield on UK’s 5-year government bonds dropped below zero for the first time yesterday, one day after the country sold its first bond with a negative yield.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.2219
R1 – 1.2253
R2 – 1.2283
R3 – 1.2317
R4 – 1.2350

S1 – 1.2189
S2 – 1.2156
S3 – 1.2125
S4 – 1.2095

GBP/USD remained supported in the area around today’s low of 1.2162, with the next possible support levels being the S3 pivot (1.2125) and the round 1.2100 level. Resistance may be expected at the 20-period Exponential Moving Average (1.2202) and then, at today’s high of 1.2234.

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