GBP/USD Forecast: Can it climb above critical resistance? Dollar weakness may not last forever

• GBP/USD has surged amid an upbeat market mood stemming from hopes for a vaccine.
• A leap in UK jobless claims and rising speculation about negative rates may weigh on the pound.
• Tuesday's four-hour chart is showing the currency pair is close to critical resistance.

A V-shaped recovery – where V is for vaccine and at least on the near-term GBP/USD chart. Markets are rallying amid several upbeat developments, and this has resulted in a sell-off of the safe-haven US dollar.

Why the dollar is falling

Massachusets-based Moderna announced that its initial vaccine trial has shown that subjects have developed antibodies for COVID-19. While the experiment is of limited scale – only eight people – the encouraging results have sent stocks rallying. The next phase is due in July.

More: S&P 500: Triple triumph thanks to Moderna, potential Chinese V-shaped recovery, softer US tone on China

Markets are also encouraged by the message due out by Jerome Powell, Chairman of the Federal Reserve. In his prepared remarks, Powell pledged to keep rates low until the S returns to full employment and his tone was more optimistic than in an interview over the weekend. He will speak before a Senate Committee alongside Treasury Secretary Steven Mnuchin.

See Powell and Mnuchin in Congress: Praising programs and promising more

Another reason for optimism is an agreement by Germany and France to boost EU fiscal support by €500 billion, coming from new debt raised by the European Commission and distributed as grants. The accord still awaits approval yet the news also contributed to a better mood and pushed the greenback lower.

Why GBP/USD could fall

Investors are currently shrugging off simmering Sino-American tensions. The world's largest economies' latest clash is around funding for the World Health Organization, which China vowed to boost while America suspects Beijing's influence. Moreover, China lashed out at President Donald Trump after he said that he is taking hydroxychloroquine – an anti-malaria drug that has proved unsafe and inefficient against coronavirus, calling it "witchcraft." 

Kevin Hassett, A White House adviser, also criticized the world's second-largest economy but provided a silver lining by saying that China is adhering to the trade deal.

Other downers come from the UK. The Claimant Count Change figure for April showed a leap of 856,500 – far worse than expected and showing that the government's furlough scheme is insufficient to stop the suffering of the labor market. Sterling initially shrugged that off, but the mood may change.

The pound may also come under pressure by rising speculation about negative interest rates. Silvana Tenreyro, an external member of the Bank of England's Monetary Policy Committee seems ready to adopt the policy and said it was successful in the eurozone. Her comments join those of Andy Haldane, Chief Economist at the BOE. 

The third potential downer is Brexit. Negotiations hit the wall on Friday and Britain seems to be preparing for a no-trade-deal Brexit, announcing a new tariff regime for 2021 – when the transition period expires.

In the background, COVID-19 cases and deaths are on the decline in both the US and the UK, yet the risk of a second wave remains high. 

Overall, pound/dollar traders have many elements to factor in.

GBP/USD Technical Analysis

GBP/USD is nearing the 1.2270 level which was a swing low in early May and is where the 50 Simple Moving Average on the four-hour chart hits the price. Break or bounce? Momentum turned positive but only just. The currency pair still trades below the 100 and 200 SMAs while the Relative Strength Index is balanced.

Above 1.2270, the next resistance lines are 1.2340, 1.2375, and 1.2460 were all stepping stones on the way down. Some support awaits at 1.2250, which is provided support in both April and May, and it is followed by 1.2165, a former double-bottom. Monday's trough of 1.2075 is the next level to watch.

More: Political economy in the age of Trump – A conversation between Barbara Rockefeller and Joseph Trevisani