GBP/USD intermarket: US 10y yields through 2.50%, GBP to drop to 1.2000?

Currently, GBP/USD is trading at 1.2186, down -0.39% on the day, having posted a daily high at 1.2254 and low at 1.2169.

In respect to the fundamentals driving the price, the pound looks set to move lower with the focus that has shifted to the UK Budget tomorrow and the triggering of Article 50 this month. The key risk is not whether the Article is triggered but how much markets price in bad news ahead for the UK economy. Despite much of the negative sentiment is already priced in, given there are no clear positives but only plenty of negative sentiment that the market could dwell upon further, investors could continue to fall out of love of the pound, for at least the medium term, while Brexit unfolds.

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In respect to drivers, just today, the US 10 year yields just penetrated the key 2.51% mark putting pressure on the spread between the UK and US 10y - The price of GBP/USD is directly correlated. GBP/USD fell yesterday with the spread widening and wth today's breach of 2.51%, the pound has made a fresh daily low below the 1.22 handle. On the 4hr chart, back in January when the price of sterling rallied in tandem with US yields, this was not sustainable and when the US 10y hit 2.61%, the pound dropped like a stone to the monthly lows below 1.2000 - worth keeping an eye on given the sentiment for a Fed hike this month and gradual normalisation of policy for the res of the year.

GBP/USD levels

"Beyond a rebound, we look for further losses to the 1.1988/80 recent low and the bottom of the 5 month range at 1.1931," analysts at Commerzbank explained.

"Support stands at 1.2156 (76.4% Fib retracement of the Jan/ Feb pop higher) but we rather expect a retest (at least) of the 1.20 area in the next few weeks (bottom chart). Sell minor GBP rallies," analysts at Scotiabank added.

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