GBP/USD: Eyes set on 1.56, USD both risk‐off and risk‐on currency

The report published on Thursday titled “GBP/USD Forecast: 1.5638 or 1.5876?” (GBP USD Forecast) anticipated a break above 1.5749 and extension of the rally to 1.58‐1.5876. The rationale was relatively clam Eurozone bond markets despite Greek impasse and the resilience in the GBP despite of a strong US data.

However, the pair remains largely unchanged at 1.5730. It trades around 1.5740 on Thursday when the report was published. The pair failed to break above 1.5749 on the daily closing basis after having ended below the same on Wednesday.

The situation did not unfold as expected. The bond markets stayed calm going into the weekend, but the risk‐on witnessed on late Friday resulted in a USD rally. Moreover, the USD was being treated as a risk currency, since a solution to Greece would bring Fed one step closer to the much anticipated rate hike this year. Consequently, the GBP/USD could not extend gains over and above 1.5749.

On the other hand, bouts of risk aversion did drag the currency pair lower, however, the sell‐off in the EUR/GBP eventually ensured the losses were restricted near 1.5650‐1.5660 levels. A similar move was witnessed today – the pair hit a low of 1.5661 in the Asian session before bouncing back to a high of 1.5751 levels. At the moment, the pair is trading around 1.5730.

With Greece issue still unsolved and the country heading towards a July 5 referendum on its international bailout. The nation’s decision to call a vote on measures its creditors demand in return for more bailout aid triggered risk aversion in the financial markets. Consequently, we say the EUR/USD pair hit a low of 1.0953 in the Asian session today. Accordingly, the GBP/USD pair also hit a low of 1.5661.

With verbal assurances from the Eurozone bigwigs that a deal could be reached, the riskier assets recovered somewhat. The cable too recovered to trade above 1.57 levels. However, the immediate outlook for the pair stays bearish.

The UK final 1Q Gross Domestic Product (GDP) (expected 2.5%, previous 2.4%) due tomorrow may heighten expectations of an interest rate hike. However, the Greece issue and strong non‐farm payrolls expectations (230K), could ensure the upward revision of the GDP does not lead to a significant appreciation in the Pound.

USD rallying during risk‐on as well as risk‐off since ‐

• The dollar is being treated as a risk currency, consequently, solution to Greece issue shall keep the GBP/USD pair under check, if not lead to weakness. a solution to Greece would bring Fed one step closer to the much anticipated rate hike this year.

• On the other hand, risk aversion favours USD (rising demand for treasuries), as we witnessed in the Asian session today.

GBP/USD Technicals

1. Repeated failure to take out 1.5749 (23.6% Fib R of 1.5169‐1.5928), coupled with bearish 5‐DMA and 10‐DMA crossover opens doors for a sell‐off to 1.5660 – 1.5606 (23.6% Fib R of 1.4564‐ 1.5928).

2. The immediate support is seen at 1.5690‐1.57 (May 21 and 22 high). However, the rise to 1.5749, followed by a sell‐off below the 5‐DMA located at 1.5737 could see the pair easily take out 1.5690‐1.57 support levels.

3. Consequently, the pair is likely to test 1.5606 levels. The bearish view is at a risk of the daily close above 1.5749.