GBP/USD Daily Forecast – 200-Day Moving Average Breached for First Time Since Mid-October

The British pound continues to face bearish pressure and has declined to a five-month low after briefly trading at a one-month high at the start of the week.

Prime Minister Boris Johnson addressed UK citizens on Thursday to discuss how to UK is handling the Coronavirus outbreak. Johnson continued to express the view that the best course of action is to delay the virus so that the NHS is well-positioned to deal with it. The British PM did not resort to closing schools or banning public events, which some countries have done at this point.

Equity markets continued to decline on Thursday with the S&P 500 (SPY) posting a single-day loss of 9.57%. Markets are recovering a part of yesterday’s losses as the S&P 500 last showed a nearly 5% gain in pre-market trading. The UK FTSE 100 is also bouncing higher after trading more than 30% below its January peak yesterday.

Technical Analysis

GBP/USD broke through major support levels yesterday, and the momentum is largely to the downside at this time. There may be some reluctance from bears to position after such a sharp drop, which can trigger a bounce in the exchange rate.

The exchange rate is well outside of typical weekly ranges as the measurement from this week’s high to low is roughly double the average weekly fluctuation over the last three months. This may further cause reluctance among bears.

At the same time, the volatility in the markets overall is heightened which decreases the prospects of a mean-reversion type of move that is typically seen when exchange rates move well beyond averages.

The US Dollar index (DXY) has erased a bulk of its loss last week and is set to print a reversal candle on a weekly chart. The index has held above its 200-week moving average, and overall technicals suggest a bottom is in place. Further dollar buying stands to trigger more downside in GBP/USD.

The decline this week provides technical confirmation that the pair has reversed back into a downtrend after recovering higher in the second half of last year. This points to the potential for a move back towards the 1.2000 area over the medium to long-term.

Bottom Line

• GBP/USD has made a notable technical break which confirms a downtrend in the pair from a broader perspective.
• The dollar is set to show a technical reversal signal this week, which stands to keep rallies in GBP/USD short-lived.