Pound-to-Dollar Week Ahead: Running Out of Road on Charts but Market Sentiment is Key

- GBP/USD running out of road on charts, is vulnerable.

- Major Fib level, 200-day average bar GBP's path higher.

- Technical analyst warns of fall to 1.0463 by end of April.

- As others contemplate USD and coronavirus trajectories.

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- GBP/USD spot at time of writing: 1.2450
- Bank transfer rates (indicative): 1.2114-1.2201
- FX specialist rates (indicative):  1.2263-1.2338 >> More information

The Pound-to-Dollar rate rose nearly one and a half percent last week amid a broad improvement in investor risk appetite although it's now closing in on tough technical resistance on the charts, which leaves it especially vulnerable to any deterioration in market sentiment. 

Sterling rose against the Dollar, Euro, Japanese Yen and Swiss Franc last week but ceded ground to riskier rivals like the Aussie and New Zealand Dollars as the mood among investors brightened in response to signs of a slowdown in momentum behind the coronavirus. 

A lesser spread of the pneumonia-inducing disease in the U.S. and some European hotspots was a boon for risk appetite that benefited the Pound and other risk currencies rather than safe-havens like the Dollar, which slumped amid mounting hopes that 'lockdown' measures might soon be lifted.

However, Sterling is now approaching the 61.8% Fibonacci retracement of the 2020 downtrend while just a short distance above that resistance threshold sits the 200-day moving average, which could further protest the British currency's recent and ongiong recovery from its March trough.

"GBP/USD continues to bounce near term from the 20 day ma at 1.2118 but is currently holding below the 61.8% retracement at 1.2516, and we continue to look for this to cap the market. Failure at the 20 day ma is needed to re-target the 1.1958 September 2019 low," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "Failure here will alleviate upside pressure and refocus attention on 1.1491."

Above: Pound-to-Dollar rate shown at daily intervals with Fibonacci retracements and moving averages marked out.

Jones says the Pound is close to running out of steam but that it neeeds to see a daily close the 20-day moving-average at 1.2118 in order for the upward correction to be terminated, which will shift the market's attention back to the downside and an anticipated retest of the 2016 low at 1.1490 and the March 2020 low at 1.1409. That latter level is Sterling's lowest since 1985 although it won't be for long if Jones is right in her forecast that the Pound-to-Dollar rate will fall to 1.0463 within the next three weeks or so. 

She's advocated that Commerzbank clients bet on a decline from last weeks' 1.2425 level and has a stop-loss at 1.2520, meaning the trade idea will be nullified if that level is reached. Whether or not that threshold is reached will depend greatly on the market's appetite for risk.

“The USD continues to lose ground as commodities advance. It's all about the inverse correlation to risk for the time being - the latter of which looks decent for now as funding pressures subside. Among the outperformers overnight are the currencies that exhibit the highest betas to risk, including the ZAR and NOK. We expect the USD to continue to decline this quarter,”says Bipan Rai, North American head of FX strategy at CIBC Capital Markets in a note last week. 

The Dollar slumped and risk currencies like Sterling rallied last week alongside stock markets, which have recovered from nearly half their historic March declines on hopes that the coronavirus' advance on the world economy is slowing. This leaves the Pound, Dollar and other currencies taking cues from the daily disclosures of new coronavirus infections and deaths while also making them vulnerable to any adverse shift in market sentiment.

“We expect the Dollar to remain firm as long as risky assets remain weak. If the S&P 500 makes new lows, consistent with our cross-asset views, the broad Dollar will probably make new highs,” says Zach Pandl, global co-head of foreign exchange strategy at Goldman Sachs in a recent research note.

Above: Pound-to-Dollar rate shown at weekly intervals with Fibonacci retracements and moving averages marked out.

Negative shifts in sentiment could be caused either by a renewed increase in the spread of the infection within major economies or by any official statistics that suggest a wors-than-expected outcome for economies stemming from efforts to contain the virus. This means Chinese first quarter GDP data due out at 03:00 on Friday may also matter to the currency market because it will provide a loose indication of what might be ahead for the global economy.

“Markets continue to rally, with ever-increasing policy measures to fight the crisis, including another Fed balance sheet expansion and Europe's ESM activation. The OPEC+ agreement on production cuts should help stabilise oil prices, thus reducing the financial risks associated with leveraged higher-cost producers. Infection rates are slowing in some hot spots, but concerns over new cases in Asia leave uncertainty high. Lockdowns are likely to be extended into May,” says Christian Keller, head of economic research at Barclays. 

The daily disclosures are key to sustaining risk appetite among investors and in turn, the pecking order for exchange rates. This is because momentum behind the spread of infection is relevant to how soon the so-called lockdowns of people, companies and economies can be lifted. 

The number of new coronavirus infections rose to 78,991 in the UK on Saturday while the number of deaths rose to 9,875, implying a mortality rate of 12.5%. However, the number of new infections declared each day has continued to trend lower since setting its current peak of more than 5,900 on April 05. Meanwhile, over in the U.S., more than half a million infections combined with fatalities of just more than 20k imply a mortality rate of around 4%, although the pace of infection growth is stalling there also.

Pound Sterling can be expected to outperform the Dollar and other less risky currencies while the market mood is either sanguine or optimistic about the coronavirus outlook, but underperform if risk appetite takes a knock.

“While the past month has been marked by USD-directionality, as markets process the full economic fall-out of COVID-19, we expect that to evolve into more idiosyncratic moves,” says Elsa Lignos, global head of FX strategy at RBC Capital Markets. “Into H2 and beyond, there will be increasing focus on the UK’s twin deficits and our central expectation remains that GBP grinds lower.”

Above: Johns Hopkins University graph showing daily numbers of new coronavirus infections in the U.S.