Markets are experiencing risk-aversion and caution due to the Omicron variant and its impact on the future of global economic recovery, with the policies of global central banks still in favor of the strength of the US dollar. The GBP/USD is testing the lower line of the bearish channel on the daily chart, trying hard to hold on to prevent further collapse. This week’s losses reached the 1.3211 support level near its lowest of the year before settling around the 1.3256 level as of this writing.
The GBP/USD pair is trying hard to stop the pace of losses. The 2021 peak was recorded on June 1 at 1.4250.
Recently, the bearish expectations for the GBP/USD pair increased. In this regard, there are expectations that the currency pair may move below the 1.3000 psychological support according to a new analysis, although another analyst at a major investment bank says that any such move will be fleeting. “GBP/USD recorded a loss of 0.82% last week, which means it has lost steam in five of the past six weeks,” says Bill McNamara, head of The Technical Trader, and that there is little to suggest that the exchange rate on close to the bottom.
"A lot of this has to do with the strength of the dollar, of course, as the US adapts to the idea of a tougher stance from the Fed," the analyst adds. The weekly chart is showing that the British Pound has fallen back to levels last seen a year ago. “Although it is now more oversold than at any time since March 2020, there is still little in the broader technical picture to indicate that it has bottomed,” he adds.
McNamara added: “The next target is at 1.315 or so, at which point it will have rebounded 38.2% of the 19-month rally; and if this level fails to hold, we may yet see a bounce back to 1.29 or so.”
On the other hand, Thomas Florey, strategic analyst at UBS, is looking for a more development-oriented step from here. He said, “The recent drop in sterling was also driven by a wave of risk aversion that has swept global markets in the wake of reports regarding the new COVID-19 variant, omicron. Unsurprisingly, the British pound fell, as it is a typical risk-taking currency and this works well when stock markets rebound and suffer when they fall.”
The strategist adds that the downward movement by GBP/USD has been more moderate than during previous episodes of Covid-induced anxiety in the past.
Markets plummeted after it was announced that a new type of Covid-19 was rapidly becoming dominant in South Africa and was already spreading across the world. Investors' reaction to risk aversion is usually offset by aggressive buying of the highly liquid dollar, but it appears that investors were already so committed to holding the dollar "so long" that what followed in fact was a central liquidation. Commenting on this, Jane Foley, FX analyst at Rabobank says, “It is interesting that the US dollar has not been a major beneficiary of the return to safe havens. Not only did the yen and the Swiss franc perform better than the dollar, but even the euro and the pound regained some gains. We strongly believe that this is due to positioning. We expect the situation to return to normal soon, and we believe that the financial markets will regain confidence, which should support a sideways path for the GBPUSD moving forward," he added.
Technical Analysis
On the daily chart, the general trend of the GBP/USD is still bearish. Approaching the 1.3250 support opens for further moves downward, and the next most important support levels may be 1.3190 and 1.3070, which can push the technical indicators towards strong oversold levels. On the other hand, the bulls need to reach the resistance levels 1.3385 and 1.3450 to break the current bearish channel, otherwise the general trend of the GBP/USD will remain bearish.
Today, the currency pair does not expect any important data, and risk appetite will have the strongest impact.
