GBP/USD: Current recovery seems vulnerable

GBP/USD has been rising amid optimism coming from China but growing chances of negative rates in the UK, Brexit, and US coronavirus may weigh on markets, FXStreet’s analyst Yohay Elam briefs.

Key quotes

“The Chinese media has been talking about a bull market following the recovery from coronavirus – and traders reacted. Stocks in the world’s second-largest economy kicked off the week with gains, weighing on the safe-haven US dollar. Trading volume in Shanghai is at its highest since 2015 and interest in bullish markets is up some ten times according to Chinese search engine Baidu.” 

“COVID-19 seems to be under control in the UK, where the exception of a localized lockdown in Leicester did not stop Brits in other places from going to the pub. However, that may currently be the only factor supporting sterling.”

“Andrew Bailey, Governor oft he BoE, reportedly sent a letter to commercial banks, preparing them for negative interest rates. They may need time to just their systems to such a move – but pressure on the pound is already seen now.”

“Another adverse factor is Brexit, with talks resuming after they were postponed late last week. The gap between the EU and the UK on regulatory alignment remains wide – and no breakthrough is likely anytime soon.”

“While optimism about the global recovery is encouraging, America’s economy may already be feeling the impact of the surge in coronavirus cases. Goldman Sachs has lowered its outlook for the world’s largest economy.” 

“The ISM Non-Manufacturing Purchasing Managers’ Index due out later on Monday will likely confirm the recovery seen in early June. However, high-frequency data from later in the month – restaurant reservations, gasoline consumption, and jobless claims – show the recovery has leveled out. Further such reports may push the safe-haven dollar higher.”