GBP/USD Forecast: Extending the coronavirus-correlated rally or correcting with Brexit?

Coronavirus climb – the US dollar plunged as fears of coronavirus spread in the US and the Federal Reserve's rate cut weighed heavily on the dollar. GBP/USD was unable to take full advantage of this downfall as post-Brexit talks reached roadblocks after a more promising start. Apart from these two topics, manufacturing data in the UK and US consumer confidence are of interest. 

This week in GBP/USD: Coronavirus vs. Brexit once again

The whole world is talking about coronavirus – which has more infected more than 100,000 people and taken the lives of over 3,000. The focus shifted from Italy to the US. The Federal Reserve slashed interest rates by a double-dose of 50 basis points – and with hardly any early notice. The G7 conference call failed to result in a pledge for coordinate action – but the Fed acted. 

The move only temporarily stopped stocks from falling and investors kept on buying bonds – pricing in a reduction of 75 basis points on March 18 at one point. The US dollar came under immense pressure and GBP/USD moved higher. 

The British monetary response to the coronavirus crisis was calmer. Mark Carney, the outgoing Governor of the Bank of England, and his successor Andrew Bailey both said they are ready to act – but seemed to be in no rush to slash rates immediately. Moreover, the BOE entered the crisis with an interest rate of 0.75% while the pre-shock move rate of the Fed stood at 1.75%. 

The Fed has more room to cut, and that boosted GBP/USD. 

Nevertheless, the pound failed to rally like against the greenback like its peers – such as the euro and the yen – and the reason is Brexit. Talks about future relations kicked off in Brussels and were initially off to a positive start. While negotiators did not shake hands – due to coronavirus fears – they described the atmosphere as positive. 

However, the mood changed toward the end of the week. Michel Barnier, Chief EU Negotiator, said that there were difficulties in reaching an accord by year-end – when the transition period ends.

Late in the week, the dollar gained some ground as Non-Farm Payrolls beat expectations with 273,000 jobs gained, better than expected. However, the focus quickly shifted back to concerns about the disease.

See NFP Analysis: Superb data insufficient to stop the Fed from another double cut, USD vulnerable

UK events: Brexit talks in focus

The number of coronavirus cases in the UK continues climbing, but the country is not one of the worst-hit on the planet. If this changes, the pound could plunge. However, there is a greater chance that the US remains the center of attention. 

Brexit talks continue in the upcoming week and that will likely be a more significant market mover. If both sides report progress – even on the easier parts – sterling has room to shine. On the other hand, if the EU and the UK tackle the "level playing field" topic – Brussels' demand that the UK follow EU rules – the pound may fall. That is the most contentious topic.

The economic calendar features monthly Gross Domestic Product figures for January. Monthly GDP statistics usually have a minimal impact and the upcoming report predates the worst of the coronavirus crisis so far. 

Manufacturing data is also of interest. Most figures are posed for moderate gains.

Here is the list of UK events from the FXStreet calendar:

US events: Coronavirus headlines and full NFP buildup

Coronavirus headlines in the US are far more significant. The world's largest economy has been slow to respond to the health crisis and is only now ramping up the production of testing kits. The number of infections is set to leap and states may take additional measures to curb the crisis. 

California – home to Silicon Valley and Hollywood – declared a state of emergency and others may follow. If events are canceled, the dollar may fall on expectations for weaker economic output and additional interest rate cuts by the Federal Reserve.

Two economic releases stand out on the calendar. US inflation figures for January are set to show steady Core Consumer Price Index figures – 2.3% year on year. Headline CPI is set to soften. 

Perhaps more importantly, the University of Michigan's preliminary Consumer Sentiment Index is due to show a moderate drop. If shoppers fear the virus, it could plunge and weigh on the greenback.

The dollar will likely remain well-correlated to US bond yields and to expectations for the Federal Reserve to cut rates in the following week. 

Here the upcoming top US events this week:

GBP/USD Technical Analysis 

Pound/dollar is now benefiting from upside momentum on the daily chart and has tentatively broken above the 50 and 100-day Simple Moving Averages. The Relative Strength Index is still below 70 – outside overbought conditions. 

Resistance levels to watch are 1.3170, which capped GBP/USD in February, followed by 1.3210, a high point in late January. It is followed by 1.3285, the peak around Christmas, and then by 1.3420 and 1.3510 from mid-December. 

Support is found at 1.2950, which worked as support in January, followed by 1.29, a round level that was a low point in December. Another 50 pips down we find 1.2850, a swing low in February, followed by 1.2780, and 1.2725, the 2020 low. 

GBP/USD Sentiment

The FX Poll is pointing to further, albeit moderate gains for the pound in the short and medium terms, with no significant moves later on. Both the short and medium-term average targets have been modestly upgraded.

Related Forecasts

• EUR/USD Forecast: Overbought? ECB's inability to fight coronavirus opens door to more gains
• GBP/USD Price Forecast 2020: Pound may continue to fall on hard Brexit deadline
• Gold may top $2,000, stock crash potential, EUR/USD uptrend, and more – Interview with Joel Kruger