GBP/USD Daily Forecast – Sterling Extends Losses, 1.2600 in Focus

Will the Dollar Sustain its Rebound?

The dollar is notably stronger in the early week, the question remains if the greenback is starting an uptrend, or if this is merely a pullback in the broader decline that has taken place since mid-June.

There are a few factors that have caused the US dollar to rally this week. One that stands out, and that is making all the headlines, is development in trade conflicts between the US and China. This has provided a catalyst for a pullback in gold prices, a rise in the global equity markets and a stronger dollar.

I argue that this catalyst is not sufficient to trigger a sustained trend in the markets. Mostly because I don’t think much was accomplished over the weekend. Sure, China and the US are moving forward and have resumed trade talks. But negotiations stalled before and that can happen again. The concessions that Trump made merely got China to sit down at the table to start discussions again.

There is another catalyst, however, that I don’t think is getting a lot of attention in the early week. Recent Fed communications seem to suggest the central bank does not intend to ease monetary policy nearly as aggressively as the markets had earlier expected. This might remove some of the urgency to liquidate US dollars and therefore I think we might not see the type of downside momentum we saw in June, moving forward.

Technical Analysis

In yesterday’s forecast, I discussed a fairly important technical breakdown in GBP/USD that is likely to trigger some more downside. Specifically, the pair now trades below its 200-hour moving average, an indicator that had held it higher in the prior week.

GBP/USD has also fallen below horizontal support at 1.2655. Around yesterday’s US open, the pair attempted to regain it but ultimately failed. In early European trading today, the pair has extended lower to levels not seen since June 19.

The support level I’m watching to the downside remains at 1.2605. The proximity of the level to the psychological 1.2600 handle leads me to believe the area will have buyers.

To the upside, I expect that rallies will be met with sellers at 1.2655 resistance. If we do get above it, I see a strong confluence of resistance close to 1.2688, as noted on the above 4-hour chart.

Bottom Line

• GBP/USD appears to be on route to support at 1.2605
• Resistance at 1.2655 held yesterday and remains upside resistance in the session ahead.