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Jignesh Davda

Sterling extended losses after breaking below the 1.20 handle yesterday and trades at levels not seen in 35 years.

To put matters into perspective, GBP/USD is on pace to post back to back weekly losses that are each roughly equal to the weekly loss it saw during the Brexit vote. For March thus far, the pair shows a loss of 10% compared to the loss of about 8% in June 2016.

The pair has fallen despite a large 330 billion pound stimulus package introduced earlier in the week to aid in offsetting the negative economic impacts of the Coronavirus. GBP/USD has been further weighed by a strong greenback as investors flee from risky assets such as stocks into the dollar which is known to act as a safe-haven during uncertain times.

The US dollar index (DXY) rallied above a major technical level yesterday to trade at a fresh three-year high. The index is on pace to test the 103 level which held it lower in 2016.

Technical Analysis

GBP/USD has fallen into a consolidation after a sharp drop during yesterday’s North American session. Resistance for the session ahead is seen at 1.1636 and at a minimum, a cross above the level is needed to consider the potential for a bounce.

GBPUSD Hourly Chart

The momentum is heavily favoring more downside. It is important to note the general lack of recoveries over the past few days, especially after a break of the 1.2000 handle.

Currency pairs often bounce back, at least a little bit, after breaking through major levels such as the 1.2000 handle. But this has not been the case.

Further, if the US dollar index (DXY) gets above the 103 handle, which is a major resistance level, it is likely to be very susceptible to short-covering and bulls will be encouraged by the bullish signal it would provide.

The main argument for a bullish move in GBP/USD is that the pair is extremely oversold. However, traders looking to fade the current decline should be cautious as oversold conditions can remain for extended periods of time.


Bottom Line

  • Sterling has hit a notable low against several of the major currency pairs.
  • The dollar continues to dominate the FX markets. A bullish break above the 103 handle in the DXY index could lead to an acceleration of dollar buying.
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