GBP/USD Daily Forecast – Pound Recovers as Johnson Takes Office

Boris Johnson Declared Britain’s New Prime Minister

Johnson was officially announced as UK’s next leader which was largely expected. He takes office today, and his first task will be to select a team that will be responsible for delivering an EU exit by the end of October.

The new PM is known for his hard stance on Brexit, in that he will deliver a departure from the EU whether a deal is reached or not. This has weighed on the British pound over the last few weeks, but Sterling looks to be enjoying a bit of a relief rally following the official announcement.

With Johnson in the spotlight, and the Federal Reserve fading from it as they are in a blackout period ahead of the July meeting, GBP/USD will tend to be more sensitive to political headlines out of the UK.

The Dollar Rallies to Highs not Seen Since Late May

Another critical factor that has been weighing on GBP/USD as of late is a notably stronger dollar. The US dollar index (DXY) rallied above a peak set in the middle of June to reach levels last seen at the end of May.

I’ve mentioned before in prior forecasts that there is critical resistance at 97.65 for DXY. The index has exceeded the level slightly at this point. The price action today will be important to determine if the break is sustained.

Technical Analysis

After flirting with yearly lows GBP/USD has decisively recovered higher. The pair is on track to post a bullish engulfing candle on a daily chart. That is, if it can close near or above current levels on a daily basis.

On an hourly chart, the pair has posted a sequence of higher highs and higher lows, which further supports the view of a recovery.

However, some resistance has come into play as the pair is faced with a hurdle at 1.2486. So far, in early European trading, this level has contained to the upside.

Beyond resistance at 1.2486, the pair has a greater hurdle to overcome at the psychological 1.2500 handle. I think it will take a sustained push above the level for this recovery to turn into anything meaningful.

There is some potential here for GBP/USD bulls, although the overall momentum is firmly to the downside. The fact that the US dollar index is pushing against resistance supports the case for some upside potential in GBP/USD.

Also, EUR/USD is nearing critical support, and by correlation, Sterling might catch a lift if EUR/USD can hold above it. Specifically, the pair is near a horizontal level at 1.1118 that has held it higher for the year thus far.

Thursday’s ECB meeting stands to impact EUR/USD the most, but I expect there will be a spill over effect in the other major currencies on the back of fluctuations in the dollar.

Bottom Line

• GBP/USD is showing upside momentum but is nearing some important resistance at 1.2486 and 1.2500.
• The daily print will be important, a bullish engulfling candle can encourage buyers in tomorrow’s session.
• Ultimately, it will take a sustained break of 1.2500 for the current recovery to be taken seriously by the markets.