GBP/USD Analysis: Break below 50% Fibo. level should pave the way for further losses

• A combination of factors dragged GBP/USD to a three-week low on Monday.
• The UK political crisis, dismal UK PMI continued weighing on the British pound.
• Hawkish Fed expectations, geopolitical tensions boosted the safe-haven USD.

The GBP/USD pair dived to a three-week low, around the 1.3440 region on Monday and was pressured by a combination of factors. The British pound continues to be weighed down by growing demand for UK Prime Minister Boris Johnson's resignation over a series of lockdown parties in Downing Street. According to sources, No 10 police has given 'extremely damning' party gate evidence to Sue Gray – the senior civil servant who has been tasked with the official inquiry. The source added that “if Boris Johnson is still Prime Minister by the end of the week, I’d be very surprised.”

Apart from this, the disappointing release of the flash UK PMI prints for January further undermined sterling. In fact, the gauge for the UK manufacturing sector dropped from 57.9 in December to 56.9 while the Services PMI ticked down to 53.3 from 53.6 previous, both missing market expectations. Apart from this, resurgent US dollar demand aggravated the bearish pressure surrounding the major. The prospects for a faster policy tightening by the Fed continued acting as a tailwind for the buck, which got an additional boost from rising geopolitical risk over Ukraine.

That said, a late rebound in the US equity markets kept a lid on any further gains for the safe-haven greenback and assisted the pair to rebound nearly 50 pips from the daily low. The attempted recovery, however, lacked any follow-through and was sold into during the Asian session on Tuesday amid sustained USD buying interest. The prevalent risk-off environment, along with a goodish rebound in the US Treasury bond yields underpinned the greenback. The focus, however, will remain on the outcome of a two-day FOMC policy meeting, scheduled to be announced on Wednesday.

In the meantime, traders are likely to take cues from the broader market risk sentiment and the US bond yields. This will influence the USD price dynamics and provide some impetus to the pair amid absent relevant market moving economic releases from the UK. Later during the early North American session, the Conference Board's US Consumer Confidence Index will also be looked upon to grab some short-term trading opportunities around the major.

Technical outlook

From a technical perspective, the overnight slump confirmed a bearish breakthrough of a confluence comprising of the 100-day SMA and the 38.2% Fibonacci retracement level of the 1.3161-1.3749 move up. Bulls, however, showed some resilience below the 50% Fibo. level, which should now act as a key pivotal point for traders. Some follow-through selling, leading to a subsequent slide below the monthly swing low, around the 1.3430 region, will set the stage for additional losses. The pair might then turn vulnerable to test sub-1.3400 levels or support marked by the 61.8% Fibo. level.

On the flip side, any meaningful recovery back above the key 1.3500 psychological mark might now confront stiff resistance near the 1.3525-1.3530 confluence support breakpoint. A sustained strength beyond could trigger a short-covering bounce, though runs the risk of fizzling out ahead of the 1.3600 mark. The latter coincides with the 23.6% Fibo. level, which if cleared decisively will negate the near-term negative bias.