GBP/USD bounces back above 1.3150, 21 DMA still offers stiff resistance

• GBP/USD has recovered above 1.3150 on Wednesday as geopolitical optimism weighs on the dollar.
• But the pair is struggling to emulate the EUR/USD and break above its 21 DMA, a possible bearish sign.
• The BoE’s recent dovish move and subsequent unfavorable moves in yield spreads have diminished sterling’s appeal and continue to weigh.

Rather than being the result of any positive internal UK fundamental developments (there are none to speak of), the rise in GBP/USD on Wednesday is largely the result of currency markets taking a more positive view of the geopolitical backdrop and selling USD. Indeed, the dollar is down across the board and this has given GBP/USD some breathing space, with the pair recently able to climb back above 1.3150 for a daily gain of around 0.5%. That is a decent recovery of 0.8% from previous weekly lows in the 1.3050 region, but still leaves the pair more than 1.0% below last week’s highs near 1.3300.

In particular, the pound continues to fail to emulate the recent gains seen in the EUR/USD as it struggles to break above its 21-day moving average, which currently sits near 1.3160. Failure to break to the upside towards 1.3200, a break above which would open the door for a retest of last week’s highs in the 1.3300 area, is likely to be taken as a bearish sign for GBP/USD. Advance. And these bearish technicals come in an equally bearish fundamental context.

Analysts have noted that since the BoE’s dovish shift in which it softened its tone on the need for more rate hikes and emphasized growing concern about the health of the UK economy amid the upcoming cost-of-living cut , UK yields have stagnated. US (and European) yields, by contrast, certainly have not, as traders continue to raise tightening bets from the Fed and ECB. Divergence in central bank policy and pressure on yield spreads are likely to continue to weigh on sterling going forward.

The pair did not react to US data in the form of the final estimate of Q4 GDP growth and the ADP national employment change for March, with the latter pointing to a strong official employment report on Friday. There is arguably a lot of Fed toughness/US economic heat (high inflation, tight labor market) priced into the dollar, suggesting more strong data/bullish rhetoric this week won’t lift the dollar much further. American.

Still, the lack of events on the UK calendar means the focus will remain on US fundamentals and the aforementioned divergence from UK fundamentals. That suggests a drop to weekly lows and a possible test of yearly lows in the 1.3000 area could well be in play, assuming no more geopolitical optimism returns to FX markets.

Technical levels