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GBP/USD Eases Lower As the Dollar Attempts to Recover

GBP/USD had a strong run last week but is seen easing lower in the early day on Tuesday as the dollar attempts to recovery.
Jignesh Davda
GBP/USD

The trade-weighted dollar index (DXY) had its worst week in over a decade last week which paved the way for a 6.8% weekly recovery in GBP/USD. With the greenback trying to claw back in the early week, the currency pair is seen easing lower.

UK gross domestic product (GDP) was flat in the fourth quarter of 2019 which was in line with analyst estimates. While the data is significant, it is important to consider that it is lagging.

While some uncertainty has faded from the UK election in the fourth quarter, new risks have risen as the Coronavirus has been at the forefront of investors’ views of the market in March. There is further risk stemming from Brexit as the UK still needs to negotiate trade agreements with the EU amidst the virus chaos.

For this reason, market participants are more likely to focus on data that paints an accurate picture of where the economy stands now as opposed to in the fourth quarter. A good example of this is the survey data from purchasing managers that are expected to be released on Wednesday.

Technical Analysis

GBPUSD Hourly Chart

GBP/USD has fared better than other pairs such as EUR/USD which reversed lower to print a bearish engulfing candle yesterday.

The pair was last seen down about 1% for the week which does not seem all that significant considering the out sized gain last week.

At the same time, traders should pay close attention to the US dollar index (DXY). If the dollar starts to gain upward momentum, GBP/USD is likely to react lower.

DXY fell through an important support level at 99.62 last week. This same level held the index lower in September and then once again in February. The index was last seen probing this horizontal level.

If it manages to scale above it, dollar bulls are likely to resurface. On the other hand, if the level proves to hold, the dollar could see renewed weakness which should translate into more upside for GBP/USD.

Over the near-term, GBP/USD is consolidating lower within what appears to be a bullish flag pattern. A push above resistance at 1.2450 can provide an early signal for a bullish continuation.

On the other hand, a bearish break below 1.2144 could be indicative of a trend change.

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Bottom Line

  • GBP/USD is consolidating after a sharp push higher last week.
  • The dollar is trying to recover against its major counterparts although significant resistance is in play for the trade-weighted dollar index.
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