GBP/USD Daily Forecast – Recovery Stalls at Moving Average Resistance

GBP/USD Eases But Holds Near Highs

There was a lot of volatility late last week, but GBP/USD seems to have its own drivers and is diverging a bit from the rest of the markets.

Several assets are tracing out correlated patterns since Friday. This is based on a shift to risk aversion on the back of an escalation in the trade war on Friday. The euro has participated in this as it is commonly viewed as a funding currency.

The British pound, however, does not share the same characteristics as the single currency, and has its own news flows driving it. Last week, positive words from German Chancellor Angela Merkel led to a relief rally in GBP/USD. After selling off Sterling throughout July, Merkel’s words have had the markets repricing the potential for a no-deal Brexit.

Merkel suggested that a deal might be made, however, this view received strong opposition from French President Emmanuel Macron. I think the bottom line here is that the markets may have gotten ahead of themselves in pricing in a no-deal scenario, and are having to backtrack a bit. This is opposed to a view that we are creeping closer toward a deal. There seems to be a lot more required to take the latter scenario seriously.

In this context, I do think Sterling has a bit more upside potential, however, over the short-term, resistance has come into play. I expect this might hold the recovery in the early week, and GBP/USD could pull back a bit here.

Technical Analysis

As mentioned, the 200 MA on a 4-hour chart has capped the recovery in GBP/USD. So far, there has been a bit of selling pressure in early day trading.

The first level I have my eye on for support here is at 1.2242. This marks the lowest monthly close in 2016. So far, the price action does not seem to support a hold of the level. If it fails, there is some potential for a retest of 1.2180 which has been an important area for the month thus far. It also marks the breakout point for last weeks rally.

Bottom Line

• 1.2242 is viewed as a pivotal level. A break could see the pair retesting the breakout point at 1.2180.
• The pair needs a push above 1.2300 to confirm that the recovery rally remains intact.