GBP/USD Analysis: Short-covering kicks in ahead of Brexit talks on Tuesday

• Positive Brexit-related headlines provided a goodish lift to the British pound on Monday.
• A strong rally in equity markets undermined the safe-haven USD and remained supportive.

The GBP/USD pair caught some fresh bids on the first day of a new trading week and spiked to four-day tops, around mid-1.2800s during the early European session. The British pound got a lift after both, the UK and the EU made key concessions to avoid no-deal Brexit. The latest round of discussions are set to begin on Tuesday and reports indicate that negotiators will begin the process to finalise a deal by the end of this week. This would mean that a final agreement would be in place just after the next EU summit in Brussels in mid-October.

On the other hand, the US dollar witnessed some profit-taking amid a goodish recovery in the global risk sentiment. Adding to this, concerns that the lack of any additional fiscal stimulus could halt the current US economic recovery and the political uncertainty in the run-up to the US Presidential election in November further undermined the greenback and provided an additional lift to the major. Hence, the key focus will be on the first US presidential debate on Tuesday. This, along with the release of the US economic data later this week, will play a key role in influencing the near-term USD price dynamics.

Apart from this, the incoming Brexit related headlines with drive the sentiment surrounding the British pound and produce some meaningful trading opportunities amid absent relevant market-moving economic releases, either from the UK or the US.

Short-term technical outlook

Given that the pair has been showing some resilience below the very important 200-day SMA, the strong recovery could be attributed to some short-covering move and runs the risk of fizzling out rather quickly. That said, some follow-through buying beyond the 1.2865 immediate resistance might still push the pair further to the 1.2900 round-figure mark. A convincing breakthrough will negate any near-term bearish bias and pave the way for a move back towards conquering the key 1.3000 psychological mark.

On the flip side, any meaningful pullback now seems to find decent support near the 1.2800 mark. Failure to defend the mentioned level might turn the pair vulnerable to accelerate the slide back towards challenging the 1.2700 mark (200-DMA), with some intermediate support near the 1.2740-35 region. This is closely followed by the 38.2% Fibonacci level of the 1.1412-1.3482 positive move, which if broken decisively will set the stage for the resumption of the recent downward trajectory. The pair might then accelerate the fall further towards mid-1.2500s before eventually dropping to the key 1.2500 psychological mark.