GBP/USD Outlook: Poised to climb beyond 1.3800 mark despite COVID-19 jitters

The GBP/USD pair witnessed some heavy selling on the last trading day of the week and eroded a major part of the overnight gains to the highest level since May 2018. The British pound was weighed down by indications of an extended lockdown in Britain and downbeat UK macro data. In fact, the UK monthly Retail Sales recorded a modest growth of 0.3% in December, while core sales increased by 0.4% MoM, both missing consensus estimates.

Separately, the flash version of the UK Manufacturing PMI dropped to 52.9 in January as against a fall to 54 anticipated and 57.5 previous. Meanwhile, the gauge for the services sector plunged further into the contraction territory and came in at 38.8 for the reported month, worse than 45 anticipated and 49.4 recorded in December. The data added to worries about a slowdown in the economic activity and exerted pressure on the sterling.

On the other hand, a slight deterioration in the global risk sentiment provided a modest lift to the safe-haven US dollar and was seen as another factor that contributed to the pair's intraday fall. Concerns about the ever-increasing coronavirus cases and reports that the new UK variant was not only highly infectious but perhaps more deadly than the original strain dented investors' appetite for perceived riskier assets.

The market worries, to a larger extent, was offset by expectations of $1.9 trillion fiscal stimulus plan to help revive the US economy. This, in turn, assisted the pair to gain some positive traction during the Asian session on Monday. In the absence of any major market-moving economic releases, either from the UK or the US, developments surrounding the coronavirus saga will play a key role in driving the broader market risk sentiment.

Apart from this, the US fiscal stimulus headlines might influence the USD price dynamics and further contribute to produce some trading opportunities around the major. The key focus, however, will be on the latest FOMC monetary policy update on Wednesday and the Advance US Q4 GDP report. This would play a key role in determining the near-term trajectory for the USD and provide a fresh directional impetus to the major.

Short-term technical outlook

From a technical perspective, nothing seems to have changed much for the pair and the near-term bias still seems tilted in favour of bullish traders. The constructive outlook is reinforced by the emergence of some dip-buying on Friday and a subsequent uptick on the first day of a new trading week. Moreover, the formation of an upward sloping channel over the past four months or so further add credence to the bullish set-up.

From current levels, multi-year tops, near the 1.3745 region, now seems to act as immediate resistance. Some follow-through buying might now assist bulls to aim to reclaim the 1.3800 round-figure mark. The momentum could get extended and has the potential to push the pair further towards the top boundary of the mentioned channel. The mentioned barrier is pegged near mid-1.3800s, which if cleared decisively will be seen as a fresh trigger for bullish traders.

On the flip side, Friday’s swing low, around the 1.3635 region, might now protect the immediate downside and is followed by the 1.3600 round-figure mark. A sustained break below might prompt some technical selling and turn the pair vulnerable to accelerate the corrective slide towards the key 1.3500 psychological mark. Any further decline is more likely to find decent support and remain limited near monthly lows, around the 1.3450 region touched on January 11.