GBP/USD: Negative setup ahead of the UK GDP release

• Bond yield differential continues to rise in the USD-positive manner.
• GBP/USD has found acceptance under the 1.30 mark, trades below the 50-day moving average (MA).
• Bull relative strength index (RS) divergence on 4H chart, GBP could rise if UK Q1 GDP betters estimates.

The GBP/USD is trading on the back foot ahead of the UK first quarter GDP release.

The spread or the difference between the 10-year US treasury and the UK gilt yield stands at 147 basis points - the highest level since the mid-1980s. Clearly, the widening yield differential is GBP bearish.

Further, the momentum studies are biased bearish. For instance, the 5-day Ma, 10-day MA and 21-day MA are trending south, indicating a negative setup. The daily RSI has deepened the bearish bias.

So, the pair looks set to extend the decline further towards the 100-day MA located at 1.3869.

As of writing, the spot is trading at 1.3930. The preliminary estimate, due to at 08:30 GMT, is expected to show the UK economy expanded 0.3 percent quarter-on-quarter, compared to 0.4 percent growth registered in the fourth quarter of 2017. The annualized growth rate is seen unchanged at 1.7 percent.

Kathy Lien from BK Asset Management sees upside risks for the GDP report, given the trade and retail sales activity has improved. An above-forecast reading would add credence to the bullish price-RSI divergence seen in the 4-hour chart and could yield a corrective rally to 1.40.

On the other hand, a below-forecast print could trigger a further widening of the yield differential in the USD-positive manner. In such a case, a drop to the 100-day MA of 1.3869 cannot be ruled out.

GBP/USD Technical Levels

A break below 1.3911 (session low) could yield a pullback to 1.3869 (100-day MA). A close below that level would expose support at 1.3712 (March 1 low). On the higher side, a move above 1.3965 (April 5 low) would allow a corrective rally to 1.40 (psychological hurdle) and 1.4014 (50-day MA).