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Jignesh Davda

Investors appear to be staying clear of the British pound with GBP/USD posting a third consecutive weekly loss.

The currency pair carries an increasingly high correlation with equity markets that are plagued with concerns over a resurgence in Coronavirus cases in some parts of the world.

In addition to the virus concerns, ongoing trade negotiations with the EU also adds an element of risk for GBP/USD traders.

Prime Minister Boris Johnson is known to take a hard stance when it comes to Brexit, often showing his readiness to walk away if terms aren’t favorable.

A report from Reuters confirmed that he maintains his stance as he commented that the UK will leave on Australia terms if a deal on a future relationship is not reached.

The EU and Australia don’t have comprehensive trade agreements and follow rules set by the World Trade Organization, with some exceptions.

GBP/USD could see an increase in volatility in the early week as Tuesday is the last trading day of the month and quarter. This often leads to a rise in trading activity as investors commonly adjust their positions ahead of it.

Technical Analysis

GBPUSD 4-Hour Chart

If the correlation between equities and GBP/USD continues, the next day or so will be important in terms of what the S&P 500 does next.

The US index ended last week below its 200-day moving average, although it might be too soon to call it a clear break. A confirmed break, however, could accompany an acceleration in downward momentum which might set the tone for GBP/USD.

A horizontal level at 1.2343 has been breached and this level is seen as a line in the sand for the session ahead. The same level served to hold the pair higher last week, leading to a brief recovery above 1.2500.

While below this level, the next area of downside interest falls at 1.2277.

If GBP/USD is able to gain some upward momentum, a sustained break of 1.2343 targets 1.2411 which is a level that acted as support on several occasions last week.


Bottom Line

  • The technical outlook for GBP/USD points to further downside potential with a possible target at 1.2277.
  • Volatility is expected to rise in the early week because of typical positioning adjustments that often happen at the end of the month and quarter.

For a look at all of today’s economic events, check out our economic calendar.

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