GBP/USD Recovers Despite Record Fall in UK GDP

GDP growth in the UK was reported to fall by 10.4% in the three months to April and 20.4% in April alone as lockdown restrictions weighed heavily on essentially all areas of the economy. The GDP decline for April is the highest the UK has ever seen.

However, Sterling was little impacted by the report and is seen recovering against the dollar in early trading on Friday after a sharp drop yesterday.

GBP/USD was weighed by a steep decline in the equity markets yesterday as the S&P 500 (SPY) fell 5.76%. This led investors to flee to the dollar for its safe-haven status, putting pressure on the rest of the major currencies.

Risk sentiment has shifted after the Federal Reserve showed little enthusiasm over the economic recovery on Wednesday and as some US states are seeing a notable rise in new Coronavirus cases, warning of a potential second wave.

Market participants will be keeping a close eye on Coronavirus cases in the US and this may become a focal point for the equity markets, and in turn the dollar.

In addition to the virus, Sterling will also be impacted by ongoing progress in Brexit negotiations. The UK has until the end of the month to extend the transition period which puts the pressure on to get negotiations moving forward.

UK Prime Minister Johnson has been clear that he has no intention of requesting an extension for quite some time and has not changed his stance on the matter.

Technical Analysis

GBP/USD fell below a major horizontal level at 1.2646 yesterday and was last seen retesting this price point. The importance of it is that the level held the pair lower twice in April, triggering a notable decline on each occasion.

Yesterday’s decline accompanied momentum and combined with the recent downward break of a rising trend channel suggests the pair has entered into a correction.

For this reason, rallies are expected to be sold in the pair, in the absence of a sharp sudden rise in the equity markets.

If the pair manages to get above 1.2646, the next upside area of interest falls at 1.2741. A potential downside target for the exchange rate is seen at 1.2476.

Bottom Line

• GDP growth figures from the UK today showed a record fall of 20.4% in April.
• A swift shift to risk aversion has been driving the equity and currency markets.
• US futures markets are pointing to a recovery at today’s open which has caused the dollar to pare some of its recent gains.

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