GBP/USD Rally Weighed by Decline in Risk Appetite

GBP/USD fell under pressure after reaching highs not seen since mid-March yesterday as the dollar benefited from a shift to risk aversion.

The S&P 500 is seen under selling pressure in pre-market trading and has wiped out most of yesterday’s gains. Equity markets gained broadly yesterday on continued optimism over Friday’s US jobs report which was much better than analysts had expected.

Volatility may slow in the markets ahead of Fed decision which is scheduled for Wednesday. Central banks and governments around the world have injected unusually large amounts of money into the markets to aid the economy following the Coronavirus outbreak.

Friday’s jobs report could lead to a less dovish Fed which may take the steam out of the risk rally. In turn, this could encourage a dollar recovery.

Aside from direction from the US central bank, GBP/USD traders will also keep a close eye on incoming UK data ahead of next week’s Bank of England meeting.

Earlier comments from BoE members suggest that policymakers are looking to ease further, although it is not clear if that is to take place at the June meeting or later in the year.

MPC member Cunliffe is scheduled to speak later today and may shed some more light on the UK monetary policy stance.

Technical Analysis

GBP/USD shows strong selling pressure on the smaller time frames which suggests near-term rallies may be sold.

For the session ahead, resistance is seen at 1.2670. If the pair manages to get above the level, the next level of interest falls a 1.2726.

There is strong support in play to the downside and this could keep the pair well bid in the North American session. The first level of support is found at 1.2633 which is the same level that acted as strong resistance twice in April.

Beyond that, further support is found at 1.2609. This level carries confluence with the lower bound of a rising trend channel that has encompassed price action since late May.

It will likely require a catalyst for a downside break of 1.2609, especially ahead of the Fed decision. For this reason, it seems reasonable to expect a range between 1.2609 to 1.2726 ahead of the Fed on Wednesday.

Bottom Line

• GBP/USD has come under selling pressure on the back of a decline in global risk sentiment.
• A range may form as investors await the latest views from the Federal Reserve on Wednesday.

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