GBP/USD retreats modestly after testing 1.2600
GBP/USD has edged slightly lower after having tested 1.2600 in the European session. With the dollar facing heavy selling pressure in the risk-positive market environment, however, the pair clings to strong daily gains ahead of BOE Governor Bailey's speech.
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GBP/USD is closing in on the key 1.2600 level, where the Fibonacci 550% retracement of the downtrend that started on April 21 is located. The Relative Strength Index (RSI) indicator on the four-hour chart is sitting slightly above 70, suggesting that the pair could make a technical correction if it fails to break above that resistance at the first attempt.
In case 1.2600 is confirmed as support, the next bullish targets could be seen at 1.2650 (200-period SMA) and 1.2700 (psychological level, Fibonacci 61.8% retracement).
On the downside, 1.2550 (static level) aligns as interim support ahead of 1.2500 (psychological level, Fibonacci 38.2% retracement). A daily close above the latter could be seen as a significant bearish development and force buyers to book their profits and move to the sidelines.
GBP/USD has managed to build on last week's impressive gains and reached its highest level in more than two weeks above 1.2580. The pair faces the next resistance at 1.2600 and the bullish pressure could pick up in case this level turns into support.
The positive shift witnessed in risk sentiment at the start of the week is not allowing the greenback to find demand providing a boost to GBP/USD. The US Dollar Index, which lost more than 1% last week, is already down 0.75% on the day, reflecting the broad-based dollar weakness.
US President Joe Biden reiterated earlier in the day that they were considering reducing tariffs on China and noted that a recession in the US was "not inevitable." On top of these comments, investors continue to move away from safe-haven assets amid heightened optimism about China easing coronavirus-related restrictions. As of writing, US stock index futures were up between 0.8% and 1%, suggesting that GBP/USD is likely to preserve its bullish momentum in the second half of the day.
In the meantime, UK Foreign Secretary Liz Truss doesn't budge on their intentions to rewrite the Northern Ireland Protocol despite the Biden administration's warning that it could endanger a potential free trade deal with the US. Nevertheless, the dollar's market valuation should remain the primary driver of the pair's action at least in the near term.
In the second half of the day, the Chicago Fed National Activity Index for April will be featured in the US economic docket. Unless this data causes the market mood to sour, the greenback should stay on the back foot.
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