GBPUSD snaps 4-days losing streak, improved sentiment weighs on US Dollar

The GBPUSD rebounded strongly after 4 days of steep decline amid a series of negative headline news that drove the pound weaker against the greenback. In this article, we will walk through some of the major drivers of GBPUSD price movements as well as our observations on the daily chart.

Delta Variant

As one of the first nations to achieve high vaccination rate, the United Kingdom is once again grappling with a rapid rise in coronavirus cases, accelerated by the highly infectious delta variant. Despite cases hitting record levels since January, Boris Johnson’s administration proceeded to lift almost all covid-19 restrictions on Monday’s ‘Freedom Day’. Ironically, ‘Freedom Day’ came in an untimely manner with the announcement on Sunday that the British Prime Minister will go in self-isolation for 10 days after coming in close contact with Health Secretary, Sajid Javid, who tested positive for covid-19 on Saturday. This had effectively added to the scepticism around the premature reopening of the British economy.

Dovish stance by BoE

A bearish sentiment on the pound was also set at the start of week after Bank of England’s (BoE) interest-rate setter, Jonathan Haskel, said that “in the immediate term, the risk of a pre-emptive monetary tightening curtailing the recovery continues to outweigh the risk of a temporary period of above-target inflation”. His remarks were also aligned with the BoE governor, Andrew Bailey, who said that that BoE should not over-react on temporary inflation, as he sees this as part of the recovery from the pandemic.

Driver of US Dollar: Risk Sentiment

The tumble in GBPUSD early this week was assisted by the strengthening US dollar. The US Dollar Index (DXY) broke the 93 mark, hitting highest levels in more than 3 months. Risk-aversion driven by the rampant delta variant worldwide is seen as a boost to the safe haven currency, with rising threats of lockdowns and tightened travel restrictions. However, on Thursday, the DXY retreated from its high as risk sentiment improves with the rise in equity prices.

Technical Analysis

GBPUSD is attempting to regain its ground after breaking down from a descending channel which saw the pair pierce through its April support. Currently, the pair is up and testing its 200 day moving average support-turned-resistance line. If the pair manages to surpass this trend line, it will be met with resistance at around 1.3791, and the top band of the channel if the pair extends its gains further. Despite the short term spike, the GBPUSD remains bearish in the medium term as shown by the MACD indicator. We hold the view that the pair is likely to decline, reaching price targets around 1.3540 and 1.3430 in extension.

Summary

For the coming weeks, the main drivers for the Pound remains the covid-19 situation in UK as well as the BoE member’s comments on the situation. Markets will closely observe the hospitalization data in the UK as it is still uncertain if the high vaccination rate will keep hospitalization low. Additionally, traders should watch out for these upcoming events as they are likely to inject volatility to the pair.