GBP/USD upside potential limited in COVID-19 uncertainties
- GBP/USD hangs in the balance of COVID-19 spreading in the US and UK.
- Volatility favours the USD and Brexit will be a spanner in the works as UK submerges from COVID-19 with a scarred economy.
In acclimatised markets, GBP/USD is bobbing along between a range of 1.2351 and 1.2475, pretty much flat on the day, as anxious markets consolidate in ebbing COVID-19 panic. There is still some way to go until the 1.30 level, which it had been straddling since the start of the year, before the crisis sell-off, and risks remain tilted to the downside while below 1.2480.
Criticism that the UK government was slow to respond with measures to counter the spread of the virus appeared as well as a dash for dollar cash weighed on the pound, sending cable plummeting to a low around GBP/USD 1.1485 on March 19. There has been a recovery of late with the pair moving from the lows and scrambling back to the 1.24 handle, but cable faces a cluster of key levels, as well as adverse fundamentals, that may cap further gains, in part due to independent weakness of the pound.
Indeed, the measures taken by the Fed and other central banks to ease USD liquidity combined with the rise in coronavirus cases in the US has allowed the strength of the USD to subside. However, the uncertainty and probability of volatility dud to immense threats to the world economy are likely to underpin demand for the greenback and expose sterling's downside.
GBP fell foul of the UK’s current account deficit in recent weeks and with the trade negotiations on the backburner, a Prime Minister self-isolating, it is hard to see politics improving in favour of the pound either. The COVID-19 pandemic and subsequent spread in the UK has renewed the tussle over the 31st December transition period deadline while the EU tries to urging Britain to extend the deadline. A steadfast PM Boris Johnson is refusing to do so which opens prospects of a hard Brexit.
What now?
Markets are consolidating and waiting to see how steep the bell curves of COVID-19 are and trying to forecast the economic impacts on the local and world economy are going to be. For the UK, the challenge is how to channel the money effectively to businesses and navigate Brexit, while at the same time, keep the death tolls and spread of the virus to a bare minimum – in a crisis that is yet to peak.
While the government may have been late to the table with a COVID-19 mitigation protocol, at least the UK's Chancellor has been very forthcoming with economic relief in a bold response package, working closely with the Bank of England which has been a positive factor for the pound. Alongside a raft of Bank of England easing measures, a large loan guarantee scheme for small businesses, and as well as the ‘job retention’ scheme was super encouraging for the UK population fearing for the health, jobs and welfare.
Now, it is a matter of wait and see how much longer it will be until the number's of both the US and UK new cases and subsequent death tolls decline until the economic damage can be really assessed. Again, uncertainty and volatility should keep the US dollar in favour.
GBP/USD levels
The trendline which until very recently provided GBP/USD with support turned into resistance at 1.2665. Even if cleared, sterling may require a very strong bullish catalyst to extend its gains beyond 1.2780/70. A fall below 1.20 would bring the recently formed bottom around 1.15 under pressure. This must hold to reduce the risk of GBP/USD falling further towards the all-time low at 1.0520.