GBP/USD Daily Forecast – Recovery Extends to 1.2200 Handle

Brexit Fears on Hold, For Now at Least

After a sharp tumble early last week, GBP/USD has been consolidating losses. The markets appear to have shifted focus to developments in the trade war between the US and China which has precipitated a volatile sell-off in bond yields and equity markets.

News that the new UK PM is not putting an effort to make a deal has not had much of an impact on Sterling. The Guardian reported yesterday that “Boris Johnson has no intention of renegotiating the withdrawal agreement and a no-deal Brexit is his central scenario.”

The main obstacle to reaching a deal is the Irish backstop. EU officials that spoke to the Guardian pointed out that the UK has not put forward any proposal on how to deal with the issue.

It can be argued that much of this news is already priced in considering how much Sterling has declined over the past month or so. For that reason, it doesn’t seem likely that any more headlines about a no-deal Brexit will move the exchange rate all that much over the next few days.

US monetary policy will tend to be an important driver. Since Trump announced new tariff’s on Chinese goods, the markets have once again ramped up expectations of a rate cut in the United States. Two Fed members are scheduled to speak later today which should provide some insight on whether the central bank is on the same page.

Technical Analysis

From a broader perspective, GBP/USD is in a technical breakdown that has reached a point of exhaustion. On the shorter time frames, the pair is attempting to recover higher.

Consider the outlook from the higher time frames, it is likely that sellers are going to be stepping in on rallies.

Currently, the pair is pushing against a fairly significant resistance confluence on an hourly chart. GBP/USD is testing the 76.4% Fibonacci retracement measured from a high posted on the last day of July. It is also testing the upper boundary of a rising trend channel. Technically, it is above it, but the candle close in relation to it will be important.

I think that if the pair successfully breaks out from here, it can attempt to trigger some stops above the 1.2249 high. In the event sellers contain price action here, I would expect a return to 1.2150 or even slightly lower to retest the lower bound of the rising trend channel.

Bottom Line

• GBP/USD is recovering as the dollar continues to weaken.
• Resistance is in play and a rejection here could trigger a pullback to the support which is around the mid-point of the channel.