GBP/USD Recovers as the Dollar is Weighed by EU Stimulus Efforts and Risk-On Sentiment

GBP/USD found buyers shortly after the weekly open and has recovered nearly 1.5% from yesterday’s low as a decline in the greenback underpinned the exchange rate.

News of a proposed 500 billion euro fiscal stimulus package in the EU weighed on the dollar, triggering a single-day three quarter percent decline in the trade-weighted dollar index (DXY).

The greenback was further weighed by an increase in risk appetite with the S&P 500 (SPY) making yet another attempt to break a major resistance area seen near $294.

The Office for National Statistics reported the unemployment rate in the UK at 3.9%, down a tick from the prior reading. Analysts had expected a rise to 4.4%.

While the official unemployment rate was stronger than expected, the number of people filing for unemployment claims rose to 857 thousand in April against the analyst forecast of 675 thousand. This compares to 12 thousand people filing for claims in March.

Considering that the unemployment rate only covers the three months to March, the jobless claims figures signal that unemployment may have risen sharply in April.

The UK announced a new Brexit tariff regime that will eliminate tariffs on 30 billion pounds worth of imports, or about 60% worth of trading coming into the UK.

The new tariff, referred to as the UK Global Tariff (UKGT), will become effective at the end of the transition period on January 1, 2021.

Technical Analysis

GBP/USD has made a notable recovery and there has been momentum behind the rally that began shortly after this week’s market open.

At the same time, the pair is facing some notable resistance. It is currently testing a horizontal level at 1.2266 which is considered a major level. It previously served to hold the pair higher at the end of April and in early May.

In addition to the horizontal level, the upper bound of a declining trend channel is also in play. This channel originates from the high posted at the end of April.

GBP/USD broke lower on Friday from a range that had been playing out since late March. This has likely drawn out Sterling bears. In this context, a rally above resistance stands to trigger some stops from those positioned short.

Bottom Line

• The dollar index has turned sharply lower which has aided a GBP/USD recovery.
• The pair is at a critical inflection point as it faces a confluence of resistance.