GBP/USD recovers back above 1.3150 as dollar broadly weakens, but 21DMA still offering strong resistance

• GBP/USD has recovered back above the 1.3150 mark on Wednesday as geopolitical optimism weighs on the dollar.  
• But the pair is struggling to emulate the likes of EUR/USD and break above its 21DMA, a potential bearish sign.
• The BoE’s recent dovish shift and subsequent unfavourable moves in yield spreads have dampened GBP’s appeal and continues to weigh.

Rather than being a result of any positive domestic UK fundamental developments (there are none to speak of), GBP/USD upside on Wednesday is largely a result of FX markets taking a more positive view of the geopolitical backdrop and selling USD. Indeed, the buck is down across the board and this has handed GBP/USD some respite, with the pair recently able to climb back to the north of the 1.3150 level for an on-the-day gain of around 0.5%. That’s a decent 0.8% recovery from earlier weekly lows in the 1.3050 region but still leaves the pair more than 1.0% below last week’s peaks near 1.3300.

Notably, cable continues to fail to emulate the recent gains seen in EUR/USD as it struggles to push above its 21-Day Moving Average, which currently resides near 1.3160. Failure to break higher towards 1.3200, a break above which would open the door to a retest of last week’s highs in the 1.3300 area, is likely to be taken as a bearish sign for GBP/USD moving forward. And these bearish technicals come against an equally bearish fundamental backdrop.

Analysts have noted that, since the BoE’s dovish shift where it softened its tone on the need for further rate hikes and emphasized its growing concern about the health of the UK economy amid the coming cost-of-living squeeze, UK yields have flatlined. US (and European) yields, by contrast, most certainly have not, as traders continue to up Fed and ECB tightening bets. Central bank policy divergence and pressure on yield spreads are likely to continue to weigh on sterling looking forward.

The pair was unreactive to US data in the form of the final estimate of Q4 GDP growth and March ADP national employment change, with the latter pointing to a strong official jobs report on Friday. Arguably, there is a lot of Fed hawkishness/US economic heat (high inflation, tight labour market) priced into the buck, suggesting further strong data/hawkish rhetoric this week won’t boost the US dollar much more.

Still, the lack of UK calendar events means the focus will remain on US fundamentals and the aforementioned divergence to UK fundamentals. That suggests a drop back towards weekly lows and a potential test of annual lows in the 1.3000 area may well be on the cards, assuming that further geopolitical optimism doesn’t come back into FX markets.