Currency Pair of the Week: GBP/USD

This could be a volatile week for GBP/USD!


There are many factors that could influence the near-term price action of GBP/USD this week.  The Coronavirus continues to spread throughout the US and there has been a recent surge in new cases throughout the UK as well.  The US ranks first in coronavirus related deaths while the UK ranks fourth, as Mexico just moved ahead of them.  Re-closings have replaced re-openings in many cities and states in the US.  The UK has also seen localized lockdowns in parts of Manchester, Lancaster and Yorkshire as transmission rates increase. US congress seems to be far apart on agreeing to a new financial aid package, with emergency unemployment benefits expiring on July 31st.  UK/EU Brexit deal talks have stalled and are expected to resume later this month.  In addition, the US and the UK are working on a trade deal with each other.  A meeting is planned for this week. 

Last week, the FOMC stated that “The path of the economy will depend on the course of the virus.”  This phrase was new to the FOMC statement and echoes the thinking of most global central banks.  Thursday, the Bank of England (BOE) with meet and must address the same issue.  Current rates are at 0.10%, and expectations are for unchanged.  There has been some talk recently from BOE officials regarding negative interest rates, however this will most likely be on hold for the current meeting.  It will, however, be important to watch for any type of language related to negative interest rates.

Technically, the US Dollar (DXY) has been in a free fall for the last month.  On Thursday, DXY closed decisively below a trendline dating back to May 2011 (green line).  On Friday however, price reversed with a bullish engulfing candle and is hovering near the important trendline today.    The direction of DXY will be closely monitored by traders around this important, long-term trendline.

Source: Tradingview, City Index

GBP/USD has been on a strong move of its own over the last month, however this may have been primarily due to US Dollar weakness.  On Friday, the pair put in a shooting star, which is a one candle reversal formation,  with an RSI reading near 80.  The extreme value in the RSI would indicate that it may be time for a reversal or pullback before resuming higher. 

Source: Tradingview, City Index

On a 240-minute time frame, GBP/USD broke lower out of a rising channel dating back to July 20th and now acts as first resistance near 1.3070.  Daily resistance crosses at Friday’s highs near 1.3170, then the March 9th high at 1.3200.  First support comes in at the 38.2% Fibonacci retracement level from the July 14th lows to Friday’s highs, near 1.2906.  Below there, support crosses at the 50% retracement level near 1.2850 and then the 61.8% Fibonacci retracement level and horizontal support near 1.2480.

Source: Tradingview, City Index

This could be a volatile week for GBP/USD if coronavirus cases continue to rise in the UK and/or the US.  In addition, there may be squaring up of positions ahead of the BOE meeting on Thursday.  Also watch the DXY for possible clues into the near-term direction of GBP/USD.

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