GBP/USD dips towards 1.3550, slips under 21DMA as risk-off flows, weak UK data weigh

GBP/USD broke out to fresh weekly lows on Friday and has continued to press lower as the US trading session has gotten underway, with sterling succumbing to weak data and risk-off flows that are weighing broadly on risk-sensitive G10 currencies. At current levels just above the 1.3550 mark, GBP/USD now trades about 0.3% lower on the day, taking on the week losses to about 0.9%. With the latest drop having taken the pair back below the 21-day moving average for the first time since this time last month, the sterling bulls will be concerned that GBP’s near-term momentum has turned negative. The main area of support for cable traders to now keep an eye on is at the 1.3500 level.

Global equities tumbled on the final trading day of the week with traders citing the usual concerns about Fed tightening as well as week Netflix earnings, and this has dragged other risk assets (like commodities) and bond yields lower in tandem. This has hurt sentiment towards the more risk-sensitive currencies in the G10 such as sterling, which has also suffered after a larger than expected drop in Retail Sales in December. Data released by the UK’s ONS on Friday showed that headline Retail Sales dropped 3.7% MoM, much larger than expectations for a 0.6% MoM decline.

“The December retail sales report is unequivocally bad news, and it's reasonably clear that elevated price pressures in the goods sector contributed to the retrenchment in spending,” analysts at BMO said. Meanwhile, should next week’s Fed meeting match or exceed expectations regarding hawkishness, that could be a recipe for broad USD strength and for cable to incur further losses. A drop back to 1.3400, where the 50DMA resides, looks increasingly on the cards. Markets continue to price in a strong likelihood that the BoE hikes interest rates again at its next meeting, with BoE speak this week not doing anything to dampen such speculation, but the next meeting isn't until February 3 (just under two weeks away).