GBP/USD Forecast: Sustained break below 1.3900 to pave the way for further losses

The GBP/USD pair witnessed some heavy selling for the second consecutive session on Friday and extended its sharp retracement slide from the vicinity of mid-1.4200s, or nearly three-year tops. A combination of factors assisted the US dollar to build on the previous day's strong positive move, which, in turn, was seen as a key factor exerting pressure on the major. The greenback continued benefitting from the recent runaway rally in the US Treasury bond yields and got an additional boost from a softer risk tone around the equity markets.

Investors remain optimistic about a strong global economic recovery amid the progress in COVID-19 vaccinations and US President Joe Biden's proposed $1.9 trillion pandemic relief package. The reflation trade forced investors to price in an uptick in inflation and pushed the yield on the benchmark 10-year US government bond to the highest level since February 2020 earlier last week. Meanwhile, the rout in the fixed income market fueled fears about distressed selling in other assets and led to the global risk-aversion trade.

The pair slipped to over one-week lows, albeit showed some resilience below the 1.3900 mark and managed to regain some positive traction on the first day of a new trading week. The British government's plan to ease current lockdown measures and hopes for a swift UK economic recovery extended some support to the sterling. The uptick was further supported by news over the weekend, indicating that UK finance minister Rishi Sunak would announce £5 billion of additional grants to help businesses hit by the pandemic in his budget statement this Wednesday.

Apart from this, a goodish rebound in the equity markets weighed on the safe-haven USD and provided a modest lift to the major. Moving ahead, market participants now look forward to the final UK Manufacturing PMI print for February. Later during the early North American session, the release of the US ISM Manufacturing Index will influence the USD price dynamics and produce some meaningful trading opportunities around the major.

Short-term technical outlook

From a technical perspective, the pair managed to bound from a confluence support near the 1.3890 region. The mentioned area comprises of 100-period SMA on the 4-hourly chart and the 50% Fibonacci level of the post-BoE strong positive move. This, in turn, should act as a key pivotal point for short-term traders and help determine the pair’s next leg of a directional move. A sustained breakthrough should pave the way for a further decline to mid-1.3800s en-route the 61.8% Fibo. level, around the 1.3820-15 region and the next relevant support near the 1.3790-85 zone. The latter coincides with 200-period SMA, below which the pair might turn vulnerable to extend the sharp corrective slide.

On the flip side, any further recovery beyond the key 1.4000 psychological mark could be seen as a selling opportunity near the 1.4035 supply zone. This, in turn, should keep a lid on any further gains for the major near the 23.6% Fibo. level, around the 1.4075 region. A sustained move beyond will negate any near-term bearish bias, instead set the stage for the resumption of the recent/well-established bullish trend. The pair might then aim to reclaim the 1.4200 round-figure mark with some intermediate resistance near the 1.4170-75 area.