GBP/USD Forecast: Lower levels to watch after Boris Johnson's hard Brexit preparations break the pound
|- GBP/USD has been extending its falls to new two-year lows.
- The new British government is ramping up its preparations for a no-deal Brexit.
- Monday's technical chart is indicating a bounce amid oversold conditions.
"No deal is a very real prospect," said Michael Gove, a senior minister in PM Boris Johnson's new government. Gove will now chair a "daily operations committee" that is tasked with preparations for a no-deal Brexit. The PM will lead two other Brexit related committees that will all meet on a frequent basis.
This weekend news has been followed by fighting words from Dominic Raab – the new Foreign Secretary and a Brexit hardliner – that said that the EU will have to move on the Irish backstop. So far, Brussels has reiterated its stance that the backstop – the most thorny issue in the Withdrawal Agreement – and the WA as a whole will not be renegotiated.
The pound has extended its falls against both the euro and the dollar, with GBP/USD losing 1.2350 – the lowest since March 2017.
Some suspect that Johnson's tough stance is merely rhetoric that is intended to woo Brexit-supporting voters back from Nigel Farage's Brexit party and that he plans a snap election. Nevertheless, the clock is ticking toward the October 31st deadline and investors are taking note.
Cable's fall is also a result of the dollar's strength. The US reported an annualized growth rate of 2.1% in the second quarter – better than expected – and diminishing chances of a long cycle of rate cuts by the Federal Reserve. The Fed is set to reduce the Federal Funds Rate on Wednesday but signal that this is just a cautionary move.
The Bank of England's decision is eyed on Thursday. The BOE has been assuming a smooth Brexit and intends to raise rates. However, Governor Mark Carney and his colleagues have expressed concern about Brexit and also about global trade tensions and may now remove their hawkish bias.
Today's lack of substantial economic indicators means that political developments – prominently from Boris Johnson's 5-day old government – to rock the pound.
GBP/USD Technical Analysis - Oversold
The Relative Strength Index (RSI) on the four-hour chart is well below 30 – indicating oversold conditions and a potential short-lived bounce. Nevertheless, downside momentum remains robust and the pair's loss of uptrend support is also a bearish sign.
Resistance awaits at the previous 2019 low of 1.2380 which now turns into support. 1.2420 provided support last week and is the next line to watch, closely followed by 1.2440 which was a double-bottom earlier this year.
The first downside level to watch is the fresh two-year low of 1.2325 recorded earlier. The next lines already date back to 2017. They include 1.2305, 1.2225, and 1.2100.
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