GBP/USD Outlook: Set-up favours bulls, upbeat US economic outlook might cap gains

A combination of supporting factors assisted the GBP/USD pair to regain positive traction on the first day of a new week and move back above the 1.3900 mark. As investors looked past Friday's blockbuster US NFP report, the upbeat market mood prompted some selling around the safe-haven US dollar. The British pound was further supported by the highly successful vaccination distribution program in the UK and the gradual reopening of the economy. In fact, UK Prime Minister Boris Johnson announced the second phase of lockdown easing on Monday and confirmed that nonessential stores will be allowed to reopen from April 12.

Meanwhile, the USD remained depressed and failed to gain any respite from upbeat US ISM Services PMI, which jumped to 63.7 in March from 55.3 previous. This was well above consensus estimates and added to the narrative of a relatively faster US economic recovery from the pandemic. The data, however, did little to impress the USD bulls or hinder the pair's intraday positive move. Nevertheless, the pair ended near the top end of its daily trading range and climbed to over two-week tops during the Asian session on Tuesday.

The ongoing retracement slide in the US Treasury bond yields held the USD bulls on the defensive, which, in turn, extended some support to the major. That said, a softer tone around the US equity futures drove some haven flows towards the greenback and might keep a lid on any meaningful upside for the pair, at least for the time being. In the absence of any major market-moving economic releases, either from the UK or the US, the USD price dynamics will continue to play a key role in influencing the pair's intraday momentum.

Against the backdrop of the upbeat US economic outlook, US President Joe Biden's over $2 trillion infrastructure spending plan has been fueling expectations for an uptick in US inflation. This, in turn, has raised doubts that the Fed will retain ultra-low interest rates for a longer period, which should limit any meaningful slide in the US bond yields. This suggests that the path of least resistance for the USD remains up and the pair's ongoing positive move runs the risk of fizzling out rather quickly.

Short-term technical outlook

From a technical perspective, the overnight momentum and acceptance above the 38.2% Fibonacci level of the 1.4243-1.3671 downfall support prospects for additional gains. The constructive set-up is reinforced by the fact that technical indicators on hourly/daily charts have been gaining positive traction. Hence, some follow-through buying has the potential to lift the pair further towards the 50% Fibo. level, around the 1.3960-65 region, en-route the key 1.4000 psychological mark.

On the flip side, sustained weakness below the 1.3900 mark (38.2% Fibo. level) might prompt some technical selling and drag the pair back towards the 1.3840-35 horizontal support. This is followed by the 23.6% Fibo. level near the 1.3800 mark, which if broken decisively will negate any near-term positive bias. The pair might then turn vulnerable to accelerate the fall towards intermediate support near the 1.3740 horizontal level before eventually dropping to the 1.3700 mark and multi-week lows, around the 1.3670 region touched on March 25.