GBP/USD Recovers to Retest 200-Day Moving Average as Risk Assets Gain

Reports of additional fiscal stimulus in the US, as well as continued efforts from the Fed, helped turn around the equity markets on Monday. The dollar pared some of its recent gains in response, which boosted GBP/USD.

GBP/USD fell sharply late last week on the back of a dire outlook from the Fed and concerns over a second wave in the Coronavirus.

However, markets are confident that easing efforts from central banks and governments around the world will aid in offsetting the negative economic impacts of the Coronavirus.

The focus will turn to the UK this week as the Bank of England will announce its latest monetary policy decision on Thursday.

BoE members showed a shift in their outlook in the weeks following the last meeting, showing their openness towards further easing. Several members indicated during that time that they are not ruling out taking rates into negative territory, although it remains to be seen if they go this route.

Investors will want to see if the BoE expands quantitative easing efforts as they are on pace to hit their 200 billion pound target next month. At the last meeting, two members had voted to increase the program by 100 billion pounds. Since then, communication from several BoE members suggests that the central bank has taken a much more dovish stance.

Technical Analysis

GBP/USD has regained upward momentum after a sharp sell-off late last week that continued into early trading on Monday.

Considering the broader uptrend, the pair will likely be bought on near-term dips, especially as equity markets are recovering which typically puts pressure on the dollar.

The hurdle to the upside comes from the 200-day moving average, currently residing at 1.2681. The pair tested it earlier today and sellers have defended the level thus far.

Ahead of Thursday’s BoE meeting, there could be a slowing of volatility as investors await the outcome.

The S&P 500 is set to open about 1.2% higher. If the momentum in risk appetite continues, the dollar stands to extend on its losses from Monday.

Bottom Line

• The reversal in risk sentiment has underpinned GBP/USD for a move back towards its 200-day moving average.
• Investors may be cautious in positioning ahead of the Bank of England meeting that takes place on Thursday.

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