GBP/USD Makes a Run Towards the 1.20 Handle

The US dollar is paring gains against its major counterparts as the same drivers that caused it to rise rapidly over the past few weeks have started the fade.

A $2 trillion fiscal stimulus package in the United States has been the main driver for the shift in the markets. It has led investors to put money back into other markets such as equities and precious metals.

The S&P 500 rose nearly 10% on Tuesday, erasing losses from the prior two sessions. The UK FTSE 100 is up about 8.5% for the week thus far. GBP/USD is rallying for a second consecutive session and was last seen trading at 1.1944 for a 1.63% gain.

US senators and the Trump administration agreed on the fiscal stimulus package yesterday which aims to loan money to industries and businesses impacted by the virus and put cash directly in the hands of those that have lost employment because of it. The package still requires approval from the Senate.

The United Kingdom has gone into lockdown and Reuters reported that UK citizens may face a fine of 30 pounds if they refuse to comply. Prime Minister Johnson has made a swift shift in his wait and see stance from a few weeks ago to asking UK citizens to stay at home in an effort to slow the curve in rising Coronavirus cases.

Technical Analysis

The recovery in GBP/USD has extended above Friday’s high and the psychological 1.2000 handle is within sight. The resistance level stands to trigger a pullback although the momentum, and fundamental drivers, are in favor of more upside.

A sustained break above 1.2000 shows the next level of upside resistance at 1.2220.

Support for the session ahead is found at 1.1877.

The US dollar index (DXY) shows a slight divergence. The Friday low in the index falls at 101.09 and the same level served to hold the index higher yesterday.

If DXY falls through the level, which is current looks poised to do, there could be an acceleration of upward momentum in GBP/USD.

Bottom Line

• GBP/USD is recovering as the dollar is broadly pulling back against the major currencies.
• Fiscal stimulus in the US offers the main driver for a return of risk sentiment and it stands to continue putting pressure on the greenback over the near-term.