GBP/USD Outlook: Upside seems capped ahead of Scottish elections/BoE on Thursday

  • A combination of factors assisted GBP/USD to rally over 130 pips on Monday.
  • Optimism over the gradual reopening of the UK economy benefitted the pound.
  • Dovish Fed expectations, the upbeat market mood weighed heavily on the USD.
  • The risk posed by Scottish elections kept a lid on any further gains for the major.

The GBP/USD pair staged a solid bounce from the 1.3800 mark, or two-week lows touched on Monday and recovered a major part of the previous session's heavy losses. The strong intraday positive move was sponsored by the emergence of some fresh selling around the US dollar and optimism over a strong economic recovery in the UK, bolstered by the easing of COVID-19 restrictions. In fact, the UK Prime Minister remains on track to go ahead with further restriction loosening and dispense with the one metre-plus social distancing rule on June 21. Regarding international travel, Johnson noted that there will be some opening up on May 17 but added that they need to be as cautious as they can.

On the other hand, the USD struggled to capitalize on last week's goodish rebound from the lowest level since February 26 amid expectations that the Fed will keep interest rates low for a longer period. Adding to this, the underlying bullish sentiment in the financial markets further undermined the greenback's relative safe-haven status. The USD remained depressed following the disappointing release of the US ISM Manufacturing PMI, which dropped to 61.7 in April from the 38-year high level of 64.7 touched in the previous month. The USD was further pressured by not so optimistic comments by the Fed Chair Jerome Powell, saying that the US economy was doing better but was not out of the woods yet.

The pair rallied over 130 pips intraday, albeit lacked any follow-through buying, instead met with some fresh supply during the Asian session on Tuesday. Despite the supporting factors, the risk posed by the upcoming Scottish elections held bulls from placing aggressive bets. Polls are pointing to a supermajority for pro-independence parties in Scotland's parliament, which might intensify pressure on the UK PM Boris Johnson to allow a second independence referendum. Investors might also prefer to wait on the sideline ahead of the latest monetary policy update by the Bank of England on Thursday. This, in turn, warrants some caution before positioning for any further near-term appreciating move.

Market participants now look forward to the final UK Manufacturing PMI for a fresh impetus. Later during the North American session, second-tier US economic data – Trade Balance and Factory Orders – might influence the USD price dynamics and further contribute to producing some trading opportunities around the major.

Short-term technical outlook

From a technical perspective, the pair on Monday attracted some aggressive buying near a support marked by the 61.8% Fibonacci level of the 1.3669-1.4009 move up. The momentum, however, faltered near the 23.6% Fibo. level. The mentioned points should now act as key pivotal points ahead of this week's key event risks and help determine the next leg of a directional move.

In the meantime, any subsequent decline now seems to find some support near the 1.3835-30 region, marking the 50% Fibo. level. This is followed by the 1.3800 mark, which if broken decisively will be seen as a fresh trigger for bearish traders. The pair might then accelerate the slide further towards the 1.3720-15 intermediate support en-route the 1.3700 round-figure and April monthly swing lows, around the 1.3670 region.

On the flip side, the 1.3925-30 region (23.6% Fibo. level) now seems to have emerged as immediate resistance. A sustained move beyond should allow bulls to make a fresh attempt towards conquering the key 1.4000 psychological mark. Some follow-through buying has the potential to lift the pair towards an intermediate hurdle near the 1.4080 region. This is followed by the 1.4100 mark, above which the pair seems all set to test 2021 daily closing highs resistance near the 1.4135-40 region.


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