Pound-Dollar Rate in Recovery Mode but On Borrowed Time

 - GBP/USD in recovery mode, eyes 55 and 200-day averages.

- As investors cheer easing of 'lockdowns,' boosting risk assets.

- But UK plan, U.S. GDP, oil prices herald disappoinment risks. 

- GBP/USD's recovery could already be on borrowed time.

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- GBP/USD spot at time of writing: 1.2463
- Bank transfer rates (indicative): 1.2134-1.2221
- FX specialist rates (indicative):  1.2283-1.2358 >> More information

The Pound-Dollar rate was in recovery mode on Tuesday and could have scope to rise further in the short-term, some analysts say, although fundamental risks are building for the British currency and other forecasters have say the conditions are not yet in place for a sustained Dollar depreciation.

Sterling has risen this week alongside other risk currencies as investors celebrated moves by major economies to begin easing restrictions on daily life, encouraging hopes of a quick recovery from the historic depths of contraction likely to have been plumbed by many amid the current crisis, and technical analysts say the exchange rate has scope to climb further in the short-term. 

"The break out of the April 22 inside day to the upside last week is still short-term bullish for GBP/USD. It is expected to be heading back up towards the late March high and 55 day moving average at 1.2486/1.2514 while last week’s low at 1.2247 underpins," says Axel Rudolph, a senior technical analyst at Commerzbank. "Minor resistance above the 55 day moving average at 1.2514 comes in at the current April high and 200 day moving average at 1.2648."

Pound-Dollar rate gains have been made possible by an ongoing improvement in investor risk appetite that has weakened the greenback against most currencies, but especially the riskier ones like Sterling and the Canadian, New Zealand and Australian Dollars. The tentative rebound began last week and was encouraged on Monday when Prime Minister Boris Johnson said he'll set out plans over the coming days for a gradual easing of the UK 'lockdown'.

Above: Pound-Dollar rate shown at daily intervals alongside Fibonacci retracements of 2020 downtrend. 

The rub for Sterling however, is the improved mood in the markets might be on borrowed time given the damage revealed by Wednesday's U.S. GDP figures could easily top expectations, while Sterling will itself be vulnerable to disappointment over PM Johnson's plan in the event it's perceived to herald a too-slow reopening of the economy. There's also fresh Brexit concerns.

“Dollar depreciation also requires a pickup in global growth—and this third precondition has not been met. Currencies are relative prices; for the Dollar to depreciate other currencies need to appreciate, and we do not see reason to expect meaningful upside in key crosses at this time, given the fragile global growth backdrop. In our forecasts the Dollar begins to weaken around mid-year as a global economic recovery begins to take hold, but we need more confidence in that expected recovery before recommending broad USD shorts,” writes Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs.

The Dollar is overvalued by most analyst models and its yield offering to investors has been greatly reduced by Federal Reserve (Fed) interest rate cuts and quantitative easing, which potentially makes it a less attractive asset for investors to hold. But these conditions alone are not enough to ensure that any weakness in the Dollar is sustained Goldman Sachs says. A global growth recovery that gives investors a viable alternative currency to buy is also required to weaken the Dollar and sustainably lift the Pound-Dollar rate.

But the outlook for growth and investor sentiment toward the global economy could take a knock on Wednesday if the consensus for a -3.9% contraction in first-quarter GDP turns out to be too optimistic. A larger-than-expected contraction cannot be ruled out given the U.S. economy tends to produce its weakest numbers every first quarter and often underperforms economist estimates. And this might lead markets to fear that the post-coronavirus recovery will be even slower than many have assumed until now.

Above: Pound-Dollar rate shown at daily intervals alongside WTI crude oil price. 

"Crude oil remains troubled by a lack of storage and the continued pressure from the CME exchange on the USO:arcx ETP to roll its WTI futures exposure further out the curve. The risk of zero priced oil in June and perhaps even July cannot be ruled out and we strongly urge investors looking for oil exposure to consider ETF’s tracking companies, not those tracking the futures market," says Steen Jackobsen, chief economist and chief investment officer at Saxo Bank.

Then there's the price of oil, which the Pound-Dollar has a positive correlation with. Oil was wallowing in fresh losses on North American markets Tuesday and appeared headed back toward zero after the U.S. Oil Fund said it would beging shifting out of June WTI crude futures contracts and into those of subsequent months in an apparent effort to avoid the negative prices that caused haywire early last week. The fund has lost -66% of its value this year and its effort to exit the June futures contracts risk increasing pressure on prices of them, with potential implications for oil-sensitive currencies. 

The Pound-Dollar rate was 0.54% higher at 1.2489 Tuesday but there's a litany of domestic and international risks that could easily crystalise into outright headwinds for the British currency over the coming days while the nascent recovery has already brought the exchange rate into contact with 55-day moving average of prices and 61.78% Fibonacci retracement of the 2020 downtrend.

Some moving averages require exchange rates to have meaningful momentum in order for them to be overcome, momentum that Sterling might lack, while the Pound-Dollar rate has already failed to overcome the 61.8% retracement on multiple occasions. It broke briefly above the 61.8% level at 1.2514 on April 14 and April 15 before retreating back below it. And on a weekly basis, the exchange rate has failed five successive attempts to close above 1.2514. 

Above: Pound-Dollar rate shown at weekly intervals alongside Fibonacci retracements of 2020 downtrend.