GBP/USD Forecast: Bounce back? Boris' U-turn on coronavirus policy, dollar demand in play

"Stay at home" – the message heard in many European countries has finally reached the UK. Prime Minister Boris Johnson has changed his tack on battling coronavirus and now calls to avoid gatherings and work from home when possible – the opposite of the "herd-immunity" policy. 

The new policy is set to inflict considerable economic damage that is hurting the pound. Chancellor of the Exchequer Rishi Sunak – who presented a new fiscal stimulus only last week – is preparing another aid package, to be presented as early as Tuesday. 

Will it help cable recover? 

The main downward driver of GBP/USD stems from dollar strength. The greenback is proving to be the ultimate safe-haven currency in times of financial distress – which has emerged from the health crisis. Wall Street suffered another double-digit drop on Monday – the worst fall since 1987. The massive sell-off sends money into the greenback. 

The most recent trigger of the market meltdown came from President Donald Trump. Similar to Johnson, the US president also changed his tone, recommending gathering of fewer than 10 people, refusing to rule out a recession, and saying that the peak of the illness may be seen only in the summer. 

And also in America, Democrats are working toward a gargantuan $750 billion package with Republicans in Congress and the White House. The bigger the package, the larger the relief for the world, and the worse for the dollar. Agreeing on the details may take several days.

The UK reported an increase in the unemployment rate from 3.8% to 3.9% in January, while wage growth excluding bonuses decelerated from 3.2% to 3.1%. Nevertheless, this development predates the health crisis and had no immediate impact on the pound.

Later in the day, US Retail Sales figures for February may see the same fate – minimal impact. The US economy is centered on consumption, but Americans only became fully aware of the illness late in the month. As with UK figures, the publication provides information about the economic situation before the blow from coronavirus. 

See US Retail Sales February Preview: Old news or a forecast?

Overall, developments related to the disease – which has infected over 180,000 people and took the lives of over 7,000 – and fiscal responses, remain key to the next moves. 

GBP/USD Technical Analysis

The Relative Strength Index on the four-hour chart is below 30, pointing to oversold conditions. Will cable bounce? These are extraordinary times and so far GBP/USD only experienced "dead cat bounces."  Momentum remains to the downside and the currency pair trades below the 50, 100, and 200 Simple Moving Averages.

The daily low of 1.2150 provides immediate support. The next levels to watch are 1.2080 and 1.2015, both dating back to September. 

Resistance awaits at 1.2275, the daily high, followed by 1.2370 and 1.2430, both stepping stones on the way down. It is followed by 1.25, which provided support last week.

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