- The Scottish election results prompted aggressive short-covering around GBP/USD on Monday.
- The gradual reopening of the UK economy further acted as a tailwind for the British pound.
- A modest USD bounce capped gains, though the bias seems tilted in favour of bullish traders.
The British pound was the top gainer among the G10 currencies on Monday and strengthened more than 1% against the US dollar. The outcome of the Scottish Parliament election helped ease the UK political risk and was seen as a key factor that prompted some aggressive short-covering move. Nicola Sturgeon’s Scottish National Party (SNP) recorded its fourth consecutive victory and won on 64 seats. This, however, was one short of an outright majority and pushed back the risk of an imminent Scottish referendum on independence from the UK.
This comes on the back of growing optimism about the UK economic recovery from the pandemic amid a sharp drop in COVID-19 deaths and new cases. This was reaffirmed by NIESR, which raised its growth forecast for 2021 to 5.7% from 3.4% in February. The economic think tank predicts the UK economy to return to pre-pandemic levels by the end of 2022 and further acted as a tailwind for the sterling. The strong momentum got an additional boost after the UK Prime Minister Boris Johnson confirmed the next stage of lockdown easing in England.
The combination of supporting factors pushed the GBP/USD pair to the highest level since February 25, though a modest US dollar rebound capped any further gains. As investors looked past Friday's dismal US NFP report, a turnaround in the global risk sentiment drove some haven flows towards the greenback. That said, expectations that the Fed will maintain its accommodative policy stance for a longer period held the USD bulls from placing any aggressive bets and assisted the pair to hold steady above the 1.4100 mark through the Asian session on Tuesday.
In the absence of any major market-moving economic releases, either from the UK or the US, a scheduled speech by the Bank of England Governor Andrew Bailey will be looked upon for some impetus. Apart from this, comments by a slew of FOMC members and the broader market risk sentiment might influence the USD price dynamics. This should allow traders to grab some meaningful opportunities during the second part of the trading action on Tuesday.
Short-term technical outlook
From a technical perspective, the overnight swing highs, around the 1.4155-60 region now seems to act as immediate resistance. This is followed by the 1.4180 area (February 25 highs), above which the pair is likely to surpass the 1.4200 mark and aim to test YTD tops, around the 1.4235 zone.
On the flip side, any meaningful pullback below the 1.4100 mark might be seen as a buying opportunity near the 1.4045-40 region. This, in turn, should help limit the downside near a strong resistance breakpoint, now turned support near the key 1.4000 psychological mark. Sustained weakness below the latter will indicate that the recent positive move has run out of steam and prompt some technical selling.
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