Pound-Dollar Rate Week Ahead: On Borrowed Time as Brexit, Lockdown Exit Concerns Loom

- GBP/USD bounces back from -1% loss but is on borrowed time.  

- Test of 55-day MA at 1.2532 possible but losses loom further out.

- Slow-coach lockdown exit, Brexit risks could weigh on GBP ahead.

- USD remains best of a bad bunch, apt to outperform ahead of Fed.

Image © Adobe Images

- GBP/USD spot at time of writing: 1.2365
- Bank transfer rates (indicative): 1.2007-1.2094
- FX specialist rates (indicative):  1.2154-1.2228 >> More information

The Pound-Dollar rate slumped almost a full percent last week alongside other risk assets although an attempted recovery could have legs to extend over the coming days, technical analysts say, but downside risks still abound from both a technical as well as fundamental perspective beyond the very short-term. 

Sterling fell -0.94% against the Dollar last week, with losses building over the course of the Monday session as sinking oil prices undermined all currencies that have a correlation with them including the British one, although a subsequent recovery helped lift the Pound back toward its 21-day moving-average of prices at 1.2405 that's yet to actually be overcome.

The rebound carried Sterling higher for four days, although and most importantly, it still underperformed all major counterparts other than the oil-linked Norwegian Krone. Some say this bounce could have scope to extend in the short-term but that Sterling is fragile and will be vulnerable.

"The break out of the April 22 inside day to the upside is short-term bullish for GBP/USD which is expected to be heading back up towards the late March high and 55 day moving average at 1.2486/1.2532 while this week’s low at 1.2247 underpins. Failure there would push the current April low at 1.2163 to the fore," says Axel Rudolph, a senior technical analyst at Commerzbank. 

Commerzbank has been looking for Sterling to reverse lower and potentially fall to a fresh post-1985 low of 1.0463 against the Dollar in the months ahead, but the overcoming of the 21-day moving-average at 1.2405 and a test of the 55-day moving-average at 1.2532 might now need to come first. The bank's three-week outlook is for the nascent recovery to peter out and be followed by a return to 1.20 and an eventual decline to 1.1409. Meanwhile, the 1985 low of 1.0463 remains in the cards for the next one-to-three months. 

Above: Pound-to-Dollar rate at daily intervals, falls below 21-day moving-average before attempting recovery.

A Pound-Dollar recovery this week would likely require a supportive environment for other risk assets like stocks and commodities as well as the riskier commodity currencies like the Aussie, New Zealand and Canadian Dollars, which Sterling has an increasing correlation with this year. Such an environment might be likely given that some countries are increasingly seeking to reopen their economies from coronavirus-induced shutdowns.

"Its losses are checked by the 1.23 area which will likely continue to act as firm support in the near-term. From a broader timeframe, the GBP has been contained roughly between 1.22 and 1.26 since its rebound from a multi-decade low in mid-March and does not—right now—seem to have the momentum to break this channel. Resistance is 1.2400/20 and support is 1.2280/2300," says Juan Manuel Herrera, a strategist at Scotiabank. 

Risk asset performance this week could lift Sterling but it also faces a number of threats that are specific to the UK and which could set it apart from the major currency crowd in a negative way over the coming days.

Notably, Brexit concerns are returning and the UK also looks set to lag its major counterparts in reopening the economy from the coronavirus shutdown, in part because it was among the last in line to experience an outbreak but also due to a lack of testing equipment and shortage of essential personal-protective-equipment for everybody including 'key workers'. 

"Unlocking the UK economy looks like it may well end up being slower than elsewhere. Daily testing (per 1,000) is well down in the UK compared to other key countries. The outright figure (per 1,000) was 6.11 in the UK as of 22nd April, again the worst of all the key countries worst impacted. Italy, Spain Portugal, Germany and Denmark are all notably higher," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "A lack of testing for COVID-19 coupled with policy implementation risks could quickly see GBP underperformance materialise over the coming weeks."

Above: Pound-Dollar rate, weekly intervals, fails fourth attempt to overcome 61.8% Fibonacci retracement of 2020 downtrend.

Prime Minister Boris Johnson returns to work Monday after his own battle with the coronavirus and will come under intense pressure from all corners, with the market potentially included, to set out a plan to reopen the economy. This is as other countries increasingly look to return to some semblance of normality, which risks making the UK stick out like a sore thumb if for one reason or another, it's unable to keep pace. 

"With market attention now turning away from the trajectory of epidemiological curves and towards exit strategies, three observations make us very worried about the UK. The first is that testing capacity is very poor," says Oliver Harvey, a strategist at Deutsche Bank in a note to clients last week. "The second is that overwhelming public support for hard lockdowns, and relatively elevated risk perception levels of the danger of the virus, will make it difficult for the government politically to exit the lockdown without the test and trace capability. The third is that the British economy is on a relative basis heavily exposed to the virus, due to the large share of consumption in GDP. These three factors make us concerned that the hit to UK growth will be relatively harder than other economies, and be structurally bearish for GBP."

A slow exit from lockdown would be a further bearish burden for a Pound that also now risks being blighted by fresh Brexit concerns. UK and EU negotiators said Friday that only "limited progress was made" in bridging differences at the end of the first round of Brexit negotiations to take place since the onset of the coronavirus crisis in Europe, which brings into focus an end-June deadline for the UK to extend the Brexit transition period beyond December 31, which is just less than nine weeks away. 

A lack of progress in the negotiations risks stoking fresh fears over a ‘no deal’ Brexit ‘cliff edge’ and a return of the associated ‘risk premium’ that dogged the British currency last year and on many other occasions since the 2016 referendum. Meanwhile, the U.S. Dollar is still best of a bad bunch for many and could have the momentum to force the Pound lower still unless Wednesday's 19:00 Federal Reserve (Fed) monetary policy decision and statement produce further actions that undermine the U.S. currency.

"The FOMC took historically aggressive action in response to the seismic shock that hit the US economy in March. In addition to cutting rates rapidly to their lower bound, commencing massive open ended asset purchases, and opening a plethora of credit easing facilities worth trillions of dollars, the Fed also opened swap and USD repo facilities for a wide range of foreign central banks," says Ranko Berich, head of market analysis at Monex Europe. "Given the effectiveness of the measures taken so far, the Fed has no immediate reason to expand any of them at present."