GBP/USD Daily Forecast – Decline From Channel Resistance Signals Reversal Potential

The US dollar saw some reprieve in early day trading on Tuesday after President Donald Trump discussed a payroll tax cut late on Monday to help offset the negative impact the Coronavirus is expected to have on the economy.

The equity markets have pared back a bulk of yesterday’s deep losses while the US 10-year yield has nearly fully erased Monday’s sharp decline. On a trade-weighted basis, the dollar has erased a bulk of its drop from Monday.

While the prospects of fiscal stimulus in the US has lifted market sentiment in the early day on Tuesday, Sterling traders will look to the UK budget to see if Britain will follow suit.

The budget will be released on Wednesday and will be scrutinized for any implied easing measures and how the recent escalation in the Coronavirus may have impacted budget decisions.

In addition to the budget, the markets continue to expect the Bank of England to cut rates by at least a quarter percent at its March 26 meeting. The bank may also opt to cut rates sooner, after reviewing the latest budget. Last week, incoming BoE Governor Andrew Bailey commented that a rate cut was not imminent. At the same time, Bailey emphasized the importance of a coordinated move between the central bank and government.

Technical Analysis

GBP/USD sellers stepped in on a rally to the 1.3200 level in early trading yesterday and drove the pair sharply lower for a daily close below the upper bound of a declining trend channel. The pair is on track to post a bearish engulfing candle today, and a combination of the two technical developments signal a potential reversal.

A break below 1.3050 support targets a move towards 1.2961 which is a level that has acted as both support and resistance on numerous tests since October.

To the upside, bears will want to hold the pair below yesterdays daily close of 1.3122 to maintain the near-term bearish pressure.

Bottom Line

• Upside momentum seen at the weekly open has faded and the technical outlook for GBP/USD points to a potential reversal.
• The US appears to be on track to introduce fiscal stimulus. Investors will look to Wednesday’s UK budget to see if they will follow suit. Although not widely expected, the Bank of England might make a move following the release of the budget.