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GBP/USD – Pound Falls Under 1.30 as UK and EU Spar Over Free-Trade Agreement

On Monday, the pound suffered its worst one-day drop since December 17, as the UK and EU clashed over free trade talks. If the two sides continue to bicker, sentiment towards the pound could continue to sour.
Kenny Fisher
GBP/USD Price Forecast - British Pound Pulls Back

GBP/USD continues to lose ground. The pair is trading at 1.2956, down 0.31% on the day.

Pound Drops to 5-Week Low

The British pound has been hovering precariously close to the key 1.300 level for some time and finally broke below this barrier on Monday. The pound remains under pressure and has touched a low of 1.2941 on Tuesday, its lowest level since December 26. Investors reacted negatively as Prime Minister Johnson and EU chief negotiator Michel Barnier argued over a new free trade deal, and the pound fell 1.4% on Monday.

Johnson threatened to walk away from free-trade talks if the Europeans did not show more flexibility, saying “there is no need for a free trade agreement to involve accepting EU rules on competition policies, subsidies, social protection, the environment or anything similar, any more than the EU should be obliged to accept UK rules.” On the fundamental front, Manufacturing PMI improved to 50.0 in January, up from 47.5 a month earlier. It is the first time the index has not been in negative territory since April.

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Technical Analysis

The key 1.30 line has switched to a resistance role following sharp losses by GBP/USD on Monday. Above, there is resistance at 1.3075. On the downside, there is support at 1.2902, followed by a support level at 1.2850.

GBP/USD 1-Day Chart

Pacific Currencies – Daily Summary

USD/CNY

The Chinese yuan has steadied on Tuesday, after a sharp drop to start the week. USD/CNY jumped 1.2% percent on Monday, its sharpest one-day gain since August 2019. Chinese stock markets plunged 9 percent on Monday, after reopening for the first time in a week. Currently, the pair is trading at 6.9924, down 0.40% on the day.  There are no Chinese releases on the schedule. On Wednesday, China releases Caixin Services PMI, which is expected to dip to 52.0, compared to 52.5 in the last release.

AUD/USD

AUD/USD has posted slight gains in the Tuesday session. Currently, the pair is trading at 0.6714, up 0.33% on the day. As expected, the RBA maintained the benchmark rate at 0.75%, where it has been pegged since October. Analysts expect a rate cut in the next few months, although the recent sharp drop in the Aussie will make policymakers think twice before trimming rates, which would further weaken the currency.

 NZD/USD

NZD/USD is currently trading at 0.6464, up 0.04% on the day.  In economic news, Building Consents roared back with a gain of 9.9% in December, after back-to-back declines. On Tuesday, New Zealand releases employment change, which is expected to improve to 0.3% in Q4, up from 0.3% in Q3. The unemployment rate is expected to remain steady at 4.2%.

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