GBP/USD Forecast: Five reasons to extend the 500-pip fall and levels to watch

GBP/USD has been on the back foot amid rising coronavirus concerns on both sides of the pond.
Weaker GDP, US figures, doubts about PM Johnson's plan, end-of-quarter flows set to move cable.
Tuesday's four-hour chart is showing bears are still in control.

Yohay Elam FXStreet

GBP/USD traded above 1.28 in mid-June – and has been struggling to recapture 1.23 in recent hours – a 500+ pip plunge. There may be more in store. The currency pair will likely end the second quarter above its closing levels in late March – but may continue its slide.

Five GBP/USD downers

1) Leicester lockdown: The gradual reopening of the British economy – slower than continental peers – is seeing its first significant setback. Leicester, a midsized town in the Midlands, will suffer from new restrictions. New coronavirus figures from the region and the rest of the UK will be eyed.

2) Weaker growth: Final Gross Domestic Product figures tend to confirm the initial read, but things are different in coronavirus times. First-quarter GDP was downgraded from 2% to 2.2% – and the second quarter will likely see a double-digit plunge.

3) Doubts about Boris' plan: Sterling has received support in recent days as Prime Minister Boris Johnson touted a plan to reconstruct the UK and ditch austerity. While the PM invoked former US President Franklin Roosevelt's New Deal – the details that are emerging seem more modest. An investment of around £5 billion in infrastructure may fail to convince investors in an economic recovery.

4) US coronavirus: Jumping to the other side of the pond, coronavirus is out of control. Cases continue rising at a rapid pace in California, Florida, and Texas – with the latter suffering high pressure on its hospitals. Various states have reimposed restrictions or halted reopening plans – including New Jersey, where cases are falling. New York may also hit the brakes.

5) US data expectations too high: One of the reasons for market optimism came from a surge in Pending Home Sales in May. Estimates remain elevated for the Conference Board's Consumer Confidence. However, economists may have underestimated the second wave and a small miss may boost the safe-haven dollar.

See Consumer Confidence Preivvew: Modest improvement

Overall, the pound has reasons to fall and the dollar to rise.

The last day of the first half also features testimony from Jerome Powell, Chairman of the Federal Reserve. As Powell has made several public appearances lately, – and his prepared remarks are already out – the event is unlikely to rock markets. Powell is set to reiterate that without beating the disease, a return to pre-pandemic output levels is unlikely.

See Powell's Testimony Preview: Can he invigorate the risk trade?

GBP/USD Technical Analysis

Pound/dollar is suffering from downside momentum on the four-hour chart and the Relative Strength Index (RSI) is still above 30 – outside oversold conditions. The currency pair is trading below the 50, 100, and 200 Simple Moving Averages.

All in all, bears are in control.

Critical support awaits at 1.2250, which is the recent trough – the lowest since late May. It is followed by 1.2210 and 1.2165, levels that were relevant last month.

Some resistance awaits at 1.23, which limited the recovery, followed by 1.2340, a support line from mid-June. The next cap is 1.24, a round number and also where the 50 SMA hits the price. Further up, 1.2450 and 1.25 await the currency pair.

More Why the dollar is king in the US coronavirus comeback? Discover what to watch out for!

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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