Don’t Jump the Gun on the GBP/USD Breakout

The pound to dollar exchange rate scaled above the 1.2500 handle yesterday for the first time in a month. From a technical perspective, the pair looks to be signaling a bullish continuation.

However, if there is one thing that stands out about recent price action it’s the lack of volatility. This is seen across most of the currency pairs that just a few weeks ago showed out sized weekly price swings on the back of the Coronavirus escalation.

GBP/USD, in particular, has rallied for six days straight although the upward momentum is very similar in terms of momentum to the correction that took place around the turn of the month. This typically suggests that there is not a lot of strength behind the move.

The US Dollar Index (DXY) is Diverging

Aside from the lack of momentum, the US dollar index is not confirming the move in GBP/USD. While the currency pair has rallied above the high set in late March, the dollar index continues to hold above the equivalent low.

The upside break in GBP/USD would be a lot more convincing if DXY traded close to last week’s open near 98.30.

The price action seems to suggest that the move in the exchange rate has more to do with a stronger British pound than it has to do with a weaker dollar.

The Economic Calendar is Relatively Light This Week

A breakout often requires some form of a catalyst and it does not appear likely that a bullish catalyst will come from economic data this week. The highlight this week will likely be the US retail sales report that comes out on Wednesday.

Analysts have set their estimates for a big 8% drop in sales last month. With the forecast already setting expectations for a significant decline, it begs the question, how bad does this report need to be for it to benefit dollar bears?

Aside from retail sales, market participants will be keeping a close eye on the weekly jobless claims report. But despite the significantly large amount of claims over the past few weeks, the report has not accompanied much of a reaction in the markets as of late.

Technical Forecast

Rather than watching the March high in GBP/USD, I am keeping an eye on horizontal resistance at 1.2523. This same level held the pair lower in September.

If there is a clear signal of a break, I would target 1.2794 which previously acted as support.

If the pair does not manage to break above 1.2523, I would expect a move back towards range support at 1.2200.