Forex Market: GBP/USD trades near multi-day highs but upside seen limited as negative interest rate speculation persists

After advancing to a fresh multi-day high in early European trade on Tuesday on the back of improved risk appetite, GBP/USD gave back certain portion of gains later in the session, as downside risks such as the possibility of negative interest rates continued to pressure the Sterling.

In a London School of Economics webinar late on Monday, Bank of England Monetary Policy Committee member Silvana Tenreyro said that the central bank had not ruled out any policy tool, suggesting that negative interest rates could be introduced in the future if economic conditions continue to deteriorate.

“My personal view, which comes from the reading of the European experiences, is that negative rates have had a positive effect in the sense of having a fairly powerful transmission to real activity,” Tenreyro said, while adding that in Britain’s case there might be particular considerations given the size of its financial industry.

Tenreyro’s comments came one day after Bank of England’s chief economist Andy Haldane also hinted that sub-zero rates might not be ruled out.

As of 11:07 GMT on Tuesday GBP/USD was gaining 0.44% to trade at 1.2249, after touching an intraday high of 1.2268, or a level not seen since May 13th (1.2340).

From macroeconomic perspective, today market players will be paying attention to US housing data at 12:30 GMT. The number of housing starts in the country probably decreased to 0.950 million units in April, according to market expectations, from the seasonally adjusted annual rate of 1.216 million in March. The latter has been the lowest level since July 2019.

Meanwhile, the number of building permits probably dropped to 1.000 million in April from an annual level of 1.350 million in March, the lowest since July 2019.

Investors will be also looking for more clues on economic outlook during Federal Reserve Chair Jerome Powell’s testimony on Coronavirus Aid, Relief, and Economic Security Act before the Senate Banking, Housing, and Urban Affairs Committee at 14:00 GMT. The event will be conducted via a webcast.

Additionally, at 18:00 GMT Boston Fed President Eric Rosengren will participate in a webinar focused on the impact of the COVID-19 public health crisis on the New England economy and Federal Reserve actions taken in response. The event will be hosted by the New England Council.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 19.1 basis points (0.191%) as of 10:15 GMT on Tuesday.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.2166
R1 – 1.2257
R2 – 1.2318
R3 – 1.2408
R4 – 1.2499

S1 – 1.2105
S2 – 1.2014
S3 – 1.1953
S4 – 1.1891

The pair may encounter resistance at today’s high of 1.2268 at first and then, at 1.2300 (the next round level). A break above it may expose the high from May 13th, 1.2340. Support may be expected at the 20-period EMA 1.2214 first and then, at S1 pivot level of 1.2105. A break below it may expose the low from May 18th, 1.2076.