UK markets closed

GBP/USD Daily Forecast – Failed Rally Above 1.3000 Triggers Downside Pressure

Jignesh Davda

GBP/USD rallied yesterday to nearly break to a fresh one-week high before sellers stepped in to drive the pair lower. The currency pair trades relatively flat on the week thus far and has been mostly confined to a range in February.

Rate cut expectations in the US have triggered a pullback in the trade-weighted dollar index (DXY). The futures markets are showing a roughly 80% probability of a cut in June, up from 50% just a week ago.

Fed member Kaplan offered a different view yesterday and said it was too soon to determine if the recent escalation in Coronvirus outbreaks warrants a policy adjustment.

DXY rallied to highs not seen since May 2017 last week and turned lower after falling slightly short of testing the 100.00 level. The index is down about one percent from recent highs.

Brexit developments are likely to lead to elevated volatility for the pound to dollar exchange rate. The UK will begin formal negotiations with the EU on Monday which will pave the way for trade terms between the two economies. UK PM Johnson has taken a hard stance on negotiations by stating that he will not permit any extensions beyond the year-end deadline.

Technical Analysis

The drop in GBP/USD in early day trading today has momentum behind it although it might be too soon to confirm that the pair has turned lower in the downtrend that has dominated since shortly after the UK election.

The currency pair shows some support at 1.2924 and is currently testing its 20 moving average on a 4-hour chart. A failure to hold above this area builds towards a bearish case.

On the other hand, the pair has been trading in an uptrend on the shorter time frames. GBP/USD found a bottom on Thursday and has been attempting to recover since. While above support, the pair continues to show potential for another push higher.

The daily close will be important considering the pair closed above its 100-day moving average yesterday. The indicator currently falls at 1.2962 and failure to rally above it by the end of the day would be seen as a bearish development.

Bottom Line

  • GBP/USD has come under pressure in the early day although it might be too soon to call a reversal.
  • A daily close below the 100-day moving average at 1.2962 may draw sellers.

This article was originally posted on FX Empire