GBPUSD reversed early losses amid an improvement in risk sentiment, as the number of new coronavirus infections and deaths drops in Europe while many business sectors return to work.
Money Markets Point To Negative Interest Rates
GBPUSD was under severe selling pressure the last week as investors bet in negative interest rates in the UK for the first time, despite Bank of England governor Andrew Bailey rejected the scenario since it would cause many problems to the banking sector. The money markets point to negative rates as the gilt yields for up to five-year maturities are trading below zero.
During the weekend, the Bank of England’s chief economist Andy Haldane comments sparked speculation that not all British MPC are not averse going into negative rates Andy Haldane said that negative interest rates, as well as buying riskier assets under the bond-purchase program, could not be ruled out and he added that “The economy is weaker than a year ago, so in that sense, it’s something we’ll need to look at — are looking at — with somewhat greater immediacy,”
The UK deficit will hit 273 billion in 2020, as the UK economy is shrinking at the fastest pace as the March GDP contracted by 5.8%. Finance Minister Rishi Sunak extended the furlough until October but with fewer subsidies.
Bank of England Governor Andrew Bailey last week said that the BOE could help the UK overcome the extra debt piled during the COVID-19 crisis. Andrew Bailey also noted the BOE’s policies could avoid the need for austerity in the next months.
GBPUSD is 0.22% higher at 1.2129, reversing five consecutive days of losses. In May the pair has started a correction from monthly highs amid the speculation of negative interest rates, while the pullback accelerated after the pair breached below the 50-day moving average. The last trading sessions the pair has cancelled the positive momentum that started in late March and now the technical outlook is clearly bearish.
On the upside, the initial resistance for GBPUSD stands at 1.2132 the daily high. The next hurdle for the pair would be met at 1.2237 the high from Friday’s trading session. A successful break above 1.2237 is likely to open the way for a move higher to the next resistance at 1.2306 the 50-day moving average.
On the flip side, minor support stands at 1.2075 the daily low. In case of a downside move below the 1.2075 support level, the GBPUSD price could correct lower towards 1.1824 the 23.6% Fibonacci retracement. If the pair continues lower, the next support level would be met at 1.1780 the low from March 26.