GBP/USD bulls coming up for air before the next drop?

• GBP/USD correcting some of the fierce downside, but strenth could be temporary.
• Focus remains on dollar strength, is this just a rest bite - how long does the market 'need a dollar'?

We are seeing a sharp rebound in global equities following the move by the Federal Reserve to unlimited QE, knocking some wind out of the US dollar and fuelling a bid in GBP. 
At the time of writing, GBP/USD is trading at 1.1760 having travelled within a range between 1.1476 and 1.1799. However, analysts at Commerzbank argued that "near term strength is indicated to be corrective only and likely to fail in the 1.1825/1.2085 band."

Looking into the fundamentals, the US dollar, which has been the markets go-to place for the best part of the month of March, has reached what appears to be a climax point in its near 9% rally in the DXY. A topping formation has taken shape within a range of 101 and 103 and investors are beginning to wonder, with all these dollars now being printed into existence by the Federal Reserve and along with the coordinated efforts by the central banks to ensure dollar liquidity, how much longer will the market 'need a dollar' and how much further higher can it really travel?

UK finally on lockdown, too delayed?

Meanwhile, the UK has finally ordered the UK public to stay put at home under freshly announced social distancing rules made by order of the UK's prime minister, Boris Johnson. This should be good news for the markets and potentially underpin GBP strength that had otherwise been crushed by investors concerned over the lack of decisiveness from the UK leadership as to how best protect the public and UK economy from the spread of COVID-19. 

However, from a fair value standing, GBP's undervaluation is not extreme –  it remains within the one and a half standard deviation band (vs the undervaluation for other G10 cyclical currencies) – and cable can fall more before hitting some valuation limits. Also, due to the late measures taken by the UK to conquer the spread of the virus, many are concerned that we could see a huge contagion spread as the virus comes out of the incubation period.

Despite the already announced strong fiscal response from the UK authorities, a diminished workforce, on hold trade negotiations between UK and EU, the UK current account deficit as being the largest in the G10 FX space (which has been a long-standing negative for GBP), all weigh on the outlook for GBP, despite the dollar's lofty heights. Overall, the outlook for sterling does not look optimistic.

It's really a matter of the USD

While stimulus measures are welcomed and cheered by markets it is really only damage limitation at the moment until new COVID-19 cases start to slow. The US dollar should remain robust in the face of extreme volatility, uncertainty and risk-off. Moreover, all the while policy rates are now near zero in many major countries, with unconventional monetary policies widely deployed, bears waiting for a sudden and sharp recovery against the mighty greenback could find themselves queueing in the COVID-19 waiting lines for longer. It wouldn't take much more than a sudden rise in COVID-19 cases anywhere in the world to see a flight to safety in the USD again. 

GBP/USD levels