GBP/USD analysis: Overnight recovery falters ahead of 1.2200 mark, focus shifts to FOMC minutes

• The incoming Brexit-related headlines continue to influence the British Pound.
• A modest USD pullback provided an additional boost and remained supportive.
• The upside remains limited ahead of Wednesday’s release of FOMC minutes.

The GBP/USD pair had some good two-way price swings on Tuesday and was solely influenced by the incoming Brexit-related headlines. The pair initial weakened to an intraday low level of 1.2064 amid growing fears of a no-deal Brexit, especially after the European Union (EU) negotiators ruled out any renegotiation of the withdrawal agreement and the UK PM Boris Johnson’s request to remove the Irish backstop. In response to Johnson’s letter, the European Council President Donald Tusk reiterated that the backstop is insurance to avoid a hard Irish border until an alternative is found. Tusk also added that Johnson’s letter does not provide realistic alternatives to the Irish backstop.

Soft Brexit hopes trigger some short-covering

The pair, however, witnessed a dramatic intraday turnaround and rallied over 100-pips in reaction to German Chancellor Angela Merkel's comments, which revived hopes that the EU is willing to discuss an alternative and might also make some concessions to avoid a no-deal Brexit. Merkel said that backstop was a question of the political declaration on future ties rather than the Withdrawal Agreement and they must think about practical solutions, though quickly added that the withdrawal agreement wouldn't be reopened. Adding to this, a modest US Dollar pullback from three-week tops - triggered by renewed weakness in the US Treasury bond yields - remained supportive of the pair's strong up-move, though the positive momentum seems to have faltered ahead of the 1.2200 round figure mark.
 
Moving ahead, Wednesday economic docket lacks any major market-moving macro data and hence, the key focus will remain on the important release of FOMC monetary policy meeting minutes. Given that the US central bank in July lowered its benchmark interest rates for the first time since the financial crisis, the minutes will be closely scrutinized for fresh clues about any further rate cut in September, which will play a key role in influencing the near-term USD price dynamics. This coupled with any fresh Brexit news/development might further contribute towards producing some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the pair's inability to capitalize on the recovery move and failure ahead of the 1.2200 handle suggest that the near-term bearish pressure might still be far from being over. However, the 1.2125-20 region now seems to protect the immediate downside ahead of the 1.2100 mark, below which the pair seems all set to break through the 1.2070-60 intermediate support and aim towards challenging the key 1.2000 psychological mark. On the flip side, immediate resistance is pegged near the 1.2195-1.2200 region, which if cleared might prompt some short-covering move and lift the pair back towards testing a well-established downward sloping trend-channel support breakpoint - now turned resistance - currently near mid-1.2200s.