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Jignesh Davda
GBP/USD

The dollar is bouncing higher to start the new week as the markets have shifted to a risk-averse stance on the threat of new trade tariffs on Chinese imports from the Trump administration.

Secretary of State Mike Pompeo joined US President Trump in the view that the Coronavirus originated from a lab in Wuhan China. Trump has said he will soon release a “very conclusive report” that will confirm the origin of the virus.

The markets have reacted in a typical risk-off manner with equities lower to start the new week while the dollar and gold prices have gained.

Meanwhile, the UK has ramped up efforts to ensure that small businesses will receive the support they need in the face of a slowing economy. Britain’s Chancellor of the Exchequer Rishi Sunak has reluctantly agreed to provide loans to small businesses that will be 100% backed by the government. This is a shift from a previous program that was 80% backed.

The program, coined “Bounce Back Loans”, will allow small businesses to borrow a maximum of 50,000 pounds for up to six years. The first year will be interest-free while following years carry a reasonable 2.5% rate of interest. Banks will not be required to run credit checks to issue these loans.

Technical Analysis

GBPUSD 4-Hour Chart

GBP/USD has shown strong momentum to the downside after a second failure to scale above the 200-day moving average last week.

At the same time, the dollar declined with momentum last week to briefly fall to a fresh one-month low.

This is a case where the greenback is showing some strength to start the new week as a result of the risk-off sentiment while last week’s bearish momentum signals more losses to come.

In this context, the downside momentum in GBP/USD could be short-lived. For the session ahead, support is seen at 1.2400 while strong overhead resistance is found at 1.2493.

The 20-day moving average falls at 1.2440 and where the pair closes in relation to stands to influence the near-term direction.

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Bottom Line

  • GBP/USD is set to post a second day of losses, weighed by a bounce in the dollar on the back of a shift to risk aversion.
  • There are no major economic releases for the pair today and volatility may slow unless there are further developments on the potential re-emergence of a China-US trade war.
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