- GBP/USD is on the backfoot as the BoE expectations are dialled dback.
- Covid, Brexit and UK politics are in focus and weight for the pound.
- Technically, the pound has broken below a critical support line.
GBP/USD has started out the week on the backfoot. The pair is currently down some 0.44% but off the lows of the day located at 1.3430. The price has recovered to near 1.3470 after falling from 1.3535 earlier on the day.
There are prospects of a deeper run towards 1.34 the figure for the sessions ahead although a run on 1.35 the figure and nearby liquidity are still on the table for the meantime. This is illustrated below under technical analysis.
Meanwhile, from a fundamental perspective, full markets will not return until Tuesday with much of the world’s banks on holidays still observing New Year’s day that fell on a weekend. Volumes are therefore thin and true economic drivers will not kick in until Tuesday.
In this regard, the greenback remains rangebound with many markets remaining on holiday. DXY is up by some 0.65% and now trading above 96 after rallying within the 95.625/327 range. The index stays in the middle of the 95-97 trading range that has largely held since mid-November.
BoE hike expectations dialled back
The British pound has therefore run out of steam near 1.3550 as Bank of England tightening expectations have fallen back a bit. Coronavirus, domestic politics and Brexit are a risk to growth prospects.
Brexit will come roaring back into the headlines this week. A senior French official said that “At the start of January, January 4 to be precise, we will have meetings with the EU commissioners to define the process and the measures that need to be taken. Between January 4 and January 6, there are very important meetings to begin the legal process against the UK”
As for covid, so far plans are unchanged but social distancing is already happening voluntarly and hospitals and under pressure. The BBC reports that ”Prime Minister Boris Johnson said that England will continue with its Plan B Covid measures amid growing pressures on the NHS. He said it would be “folly” to think the pandemic was over and warned that pressure on hospitals would be “considerable” over the coming weeks.”
GBP/USD technical analysis
The bias is for a move to the upside in a correction of the recent bearish impulse followed by a downside continuation to test 1.34 the figure.
However, the 15-min chart is offering a bearish reversion pattern and the price is meeting 15-min resistance:
GBP/USD 15-min chart
As illustrated above, the price could be destined for a meanwhile move to the downside prior to further upside as follows:
GBP/USD H4 chart
The M-formation is a bullish reversal pattern seen on the 4-hour chart.
GBP/USD H1 chart
The hourly chart’s bearish impulse could be where the trade is. The bears will be keen to see a discount from this juncture into the liquidity zone around 1.35 the figure. A discount will be on the table for a downside continuation towards a test of 1.34 the figure.
Having said that, the price has already corrected a significant length of the bearish impulse and has reached a 38.2% Fibonacci retracement level as follows:
Bears are already engaging, therefore, there are prospects of a downside continuation already and a retest of 1.35 liquidity and the counter-trendline may not be seen so soon.