GBP/USD Rallies to Important Resistance as the Dollar Decline Slows

A recovery last week helped to limit losses for GBP/USD in May to 1.95%. Sterling benefited from a weaker dollar but remains an under performer compared to its major counterparts.

The US dollar index (DXY) posted a second straight week of losses as rising stock prices and a generally strong appetite for risk has weighed on the index. DXY reached lows not seen since the middle of March last week and continues hold near lows although the downside momentum has subsided.

Sterling, while benefiting from the dollar weakness, has been weighed by concerns over additional monetary policy easing, as well as Brexit negotiations which are taking place amidst the Coronavirus crisis.

Talks from several Bank of England members in May signaled that policymakers are looking to ease further and have not ruled out taking interest rates into negative territory. The next BoE meeting takes place on June 18.

The UK has started easing lockdown restrictions with schools reopening today after being shut for the last two and a half months. Britain is one of the hardest hit by the Coronavirus with more than 38,000 deaths and 275,000 confirmed cases.

IHS Markit reported an easing of the contraction in the UK manufacturing industry in May after a sharp decline in their PMI index for April. Rob Dobson, Director at IHS Markit, commented that “the UK is set for a drawn-out economic recovery” citing weak demand and Brexit worries as the primary drivers.

Technical Analysis

GBP/USD is seen approaching resistance at 1.2441 which may prove to be a major hurdle for the pair as the level has been well-respected as of late as both support and resistance.

Further, the current recovery appears to be taking the form of a bear flag which typically highlights more downside potential. Although it is too soon to view it as a flag pattern and only a break below the lower bound, currently near 1.2266, would provide such a signal.

Sellers may look to step in with the pair trading near the upper bound of the channel that has encompassed price action since the middle of May. Support for the session ahead, in the event of a decline, is seen at 1.2361.

Bottom Line

• GBP/USD has been recovering since mid-May but is lacking momentum, especially compared to its major counterparts during the same period.
• Major resistance is seen at 1.2441 while the upper bound of a rising trend channel falls near the level to create a confluence.

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