GBP/USD - Yield differential favors USD, bull flag on charts

GBP/USD fell sharply on Friday from 1.3448 to 1.3301 as US tax optimism strengthened the bid tone around the US dollar.

Currently, the 10-year US-UK bond yield differential stands at 122 basis points (bps); the highest level since Jun. 12. The rising yield spread adds credence to the lower highs pattern seen on the daily chart and indicates scope for a drop to 50-day MA of 1.3263. Also, short-term UK-US rate differential crashed to new YTD lows on Friday.

Still, all is not lost for the bulls as the daily chart shows a bull flag pattern. An upside break could revive the rally from the Nov. 13 low of 1.3062.

Focus on Brexit deal

Mario Blascak, Chief European Analyst at FXStreet, writes, "The shape of the Brexit deal is by far most important factor for the currency market. This is also what the bank of England has been saying in its December policy statement."

He adds, "With all the important events this year over, the GBP/USD is likely to remain within the broader range of $1.3210-$1.3450 for extended, pre-Christmas and post New Year period of time."

GBP/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik writes, "the daily chart for the pair shows that technical indicators have turned sharply lower, entering bearish territory, but also that the price holds far above its 100 and 200 SMAs, with the shortest now around 1.3230. Shorter term, and according to the 4 hours chart, the risk has lean towards the downside, as technical indicators entered negative territory, although with the downward momentum easing, while the decline accelerated on a break below the 100 SMA, and neared the 200 SMA, now a relevant support at 1.3285.

Support levels: 1.3310 1.3285 1.3230

Resistance levels: 1.3360 1.3400 1.3445