GBP/USD Forecast: Bears benefit from Brexit, BOE negativity, and botched crisis management
|- GBP/USD is trading around the lowest in seven weeks.
- Brexit, speculation about BOE rates, and mismanagement of coronavirus are weighing.
- Monday's four-hour chart is pointing to near-oversold conditions.
The virus crisis is not over, but the Brexit sage – willfully forgotten by many traders – is having a growing impact on the pound.
Both EU Chief Negotiator Michel Barnier and his British counterpart David Frost acknowledged difficulties in talks. Brussels wants the UK to agree to accept EU rules in return for easy access to the single market, while London rejects the idea. The clock is ticking down to June 2, the deadline at which both sides can ask for an extension to the transition period.
Prime Minister Boris Johnson's government has repeatedly rejected prolonging the implementation period beyond year-end. Investors fear that the UK would default to World Trade Organization rules – unfavorable terms. The news on Friday sent sterling down, and it has since failed to recover.
The pound has also been punished by growing speculation about negative interest rates. Andy Haldane, Chief Economist at the Bank of England, left the door open to such a move and to other steps in an interview over the weekend. The BOE may first opt to expand its Quantitative Easing program, pledging to buy an additional £100 billion worth of bonds, according to a Bloomberg survey.
The third reason for sterling's suffering has been the UK's ongoing lockdown – and issues of getting out of it. The contact tracing application that is tested on the Isle of Wight has had issues while concerns about safety at work have also been present in the UK press.
There is also the reason for optimism as Oxford University is advancing with its trials of a potential vaccine for COVID-19. Moreover, GSK, a large British pharmaceutical company, said it would ramp up preparations for manufacturing such immunization and would prioritize the UK.
Across the pond, the safe-haven dollar has been stable despite growing Sino-American tensions. The world's largest economies have been tussling over Huawei's operations. The Chinese telecom behemoth has been suspected of working too closely with the Communist Party.
Peter Navarro, a senior White House adviser, claimed that China was sending infected people on planes to spread the disease. Hu Xijin, editor of the nationalist Global Times – considered a mouthpiece of Beijing – tweeted that he should boost its spending on nuclear arms.
The greenback also seems to shrug off stark warnings by Jerome Powell, Chairman of the Federal Reserve. The world's most powerful central banker said that without a vaccine, the economy would not fully recover and added that unemployment could reach 25%.
US retail sales tumbled by 16.4% in April, worse than expected, while consumer sentiment for May beat expectations and bounced off the lows.
More: US April Retail Sales: Is there a rebound ahead?
These factors may boost the dollar, but as long as stocks are on the rise, GBP/USD is set to move mostly in response to UK developments.
GBP/USD Technical Analysis
The Relative Strength Index on the four-hour chart is flirting with the 30 level – on the verge of oversold conditions, which would imply a bounce. On the other hand, the currency pair is trading below the 50, 100, and 200 Simple Moving Averages and momentum remains to the downside.
The fresh seven-month low of 1.2075 is the immediate line of support. It is followed by 1.1980, which was a temporary high in March, and then by 1.18.
Resistance is at 1.2160, a former double bottom, followed by 1.2250, which also had the same role before succumbing to pressure. The next levels are 1.2270 and 1.2340.
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