Dollar Starts the Year on the Back Foot

 Sterling Looking Fresh Despite Increased Number of COVID-19 Cases

by Bogdan Giulvezan

The greenback started the New Year on the same bearish note seen at the end of 2020, losing ground against most of its counterparts, while the Pound is surprisingly strong regardless of Brexit jitters and the growing number of new coronavirus cases.

GBP/USD started 2020 around 1.3200 only to drop significantly into 1.1400 territory in March, due to virus panic, and to make a v-shaped recovery, breaking the previous high by the end of the year. Currently, the pair is trading at 1.3690, a price that was last reached back in 2018, and is approaching a major level located at 1.3700. We are faced with a classic “bounce or break” scenario and the way it unfolds may be decided by this week’s Non-Farm Payrolls data.

Key Events for the Week Ahead

The first event that may have a substantial impact on the movement of GBP/USD is scheduled Wednesday, January 6 at 2:00 pm GMT: BOE Governor Bailey will testify in London, before the Treasury Select Committee about the Financial Stability Report. Depending on the Governor’s tone and the matters discussed, the Pound could make notable moves, thus caution is recommended.

Friday, January 8 at 1:30 pm GMT we take the first look of the year at the United States jobs situation with the release of the Non-Farm Payrolls, a report that shows the change in the number of employed people during the previous month, excluding the farming sector. The release is widely regarded as a major market mover and the most important jobs data but at the same time, the Average Hourly Earnings and the Unemployment Rate come out, which are both important indicators as well. These three releases work in conjunction and offer an overview of the US jobs situation, which in turn affects the US Dollar.

Chart Analysis – GBP/USD

Although the pair is on an ascending trajectory, it is faced with an important level: 1.3700. This is a psychological and technical resistance at the same time: psychological because it is a big round number and technical because the level acted as S/R in the past, thus it may very well reject price again.

As mentioned prior, we are dealing with a bounce or break scenario, where a break would incentivize more traders to go long, thus making 1.4000 a probable medium-term target. On the other hand, a bounce would send prices back into 1.3400 territory, or even lower, into the 100 periods EMA (blue line on the chart).

On a daily chart, the pair is riding a slow uptrend without being overbought, which increases the probability of a resistance break, however, the fundamental scene will play an important role. Either way, it’s better to wait for clear confirmation before committing to longs or shorts.