GBP/USD Forecast: A break below 1.2000? Believing Boris Johnson means a sterling sell-off

• GBP/USD has tumbled down as preparations for a hard Brexit intensify.
• UK GDP and political speculation are in the limelight.
• Late July's daily chart is showing oversold conditions.
• Experts see further falls in the short term but a big leap in the medium term and more gains afterward.

"Selling Britain by the pound" is a classic rock album by Phil Collins' band Genesis and this massive sterling sell-off seems like the genesis of markets believing PM Boris Johnson's pledge to leave the EU by October 31st – "do or die." GBP/USD also struggled with hawkish rate decision by the Fed and failed to cheer the Bank of England's optimism in a hectic week. It now faces the all-important UK GDP report, further political speculation, and oversold technical conditions.

What just happened: No-deal Brexit, no more Fed cuts, but new tariffs

When Boris Johnson entered 10 Downing Street on July 24th, his main message was optimism. The pound feared his reiteration that the UK must leave the EU by the October 31st deadline, but traders were still trying to decipher the colorful politician's intentions.

Johnson's original words were initially dismissed, as some political analysts saw them as part of a campaign to woo supporters of Nigel Farage's Brexit Party back to the Conservative fold. Snap elections cannot be ruled – especially after the Tories lost a by-election in Wales – reducing the PM's majority to only one MP.

However, pound traders have sprung into action after Michael Gove's stated that a no-deal Brexit has "very real prospects." His weekend comments were already taken seriously. Gove – Johnson's fellow Vote Leave teammate – is in charge of one of three ministerial committees preparing for a hard exit from the EU. 

The pound began tumbling down across the board.

The moves were exacerbated by the PM's refusal to meet his European counterparts if they refuse to open the Brexit Withdrawal Agreement – which they did. Moreover, Chancellor of the Exchequer Sajid Javid has announced an additional £2.1 billion budget for such a move. 

Believing Boris Johnson turned into breaking the pound. GBP/USD has dropped below 1.2100 – the lowest since January 2017.

Nevertheless, there is one powerful institution that refuses to factor in a no-deal Brexit. The Bank of England has left its interest rate unchanged as expected – and also continues assuming a smooth Brexit. Governor Mark Carney and his colleagues have also maintained their intention to raise rates after Brexit uncertainty is removed.

Carney refused to say how the bank sees the odds of a hard Brexit nor how it will act in such an eventuality. He left the notion that the BOE prefers to stay out of the spotlight. 

Markit's Manufacturing Purchasing Managers' Index has shown ongoing contraction in the sector with 48 points, and Construction PMI slipped to 45.3 points.

GBP/USD has struggled also due to the US dollar's strength stemming from the Federal Reserve's decision. The Fed has cut rates as expected but stressed that the outlook for the US economy is favorable and that the move is just an "insurance cut." Investors wanted to see a pledge to further reduce rates, and the disappointment sent stocks down and the US dollar higher. The greenback's ascent may continue.

See Fed Analysis: Three reasons why the dollar may continue dominating

US data has been mixed with the ADP private-sector jobs report beating expectations with 156K while the ISM Manufacturing PMI missed with 51.2 points.

The US and China have resumed face-to-face trade talks for the first time since May and decided to continue negotiating in September after labeling this round as "constructive."

However, as with assessing hard Brexit prospects, things changed quickly on this front as well. 

The calm has been abruptly broken by US President Donald Trump. The White House has announced new tariffs of 10% on the remainder of $300 billion worth of Chinese imports. The president has expressed his frustration with the slow pace of talks and alleged that his Chinese counterpart Xi Jinping had broken his promise to buy US goods.

Stock markets have resumed their sell-off, and safe-haven US bonds drew demand. The fall in US bond yields weighed on the greenback and helped GBP/USD stabilize. 

US data has been mixed with the ADP private-sector jobs report beating expectations with 156K while the ISM Manufacturing PMI missed with 51.2 points.

The jobs report met expectations with 164K Non-Farm Payrolls gained. Wages have come out at 0.3% MoM and 3.2% – above expectations, and generally supporting the dollar.

See NFP Quick Analysis: Solid data means only Trump can stop the USD rally

UK events: GDP stands out

The final and most important PMI kicks off the week. The UK services sector has likely continued growing at a modest pace. Economists expect an increase to 51 points in July – above the 50-point threshold separating contraction from expansion. The large sector is the only one that grew in June, according to Markit.

The second substantial release of the week is due out on Friday – quarterly Gross Domestic Product. The UK economy has grown by a robust rate of 0.5% in the first quarter of the year – mostly due to stockpiling ahead of the original Brexit date – March 29th.

Early indicators for the second quarter are pointing to a "payback effect" in which the economy slowed down after the temporary boost. Stagnation is likely, and outright contraction cannot be ruled out. Headlines suggesting that the UK is already entering a recession may weigh on sterling. 

Here are the events lined up in the UK on the forex calendar:

US events: Digesting the Fed

Currencies may still be reacting to the all-important Fed decision and jobs report on Monday, but will then face the ISM Non-Manufacturing PMI for July. The critical services sector gauge is set to imply upbeat growth in America's largest sector with a score around last month's 55.1 points. 

Later in the week, the Producer Price Index (PPI) – which represents inflation in the pipeline – will provide fresh insights ahead of next week's Consumer Price Index.

Comments about trade from US and Chinese officials may also move markets, and so may speeches from Fed officials. 

Here are the scheduled events in the US:

GBP/USD Technical Analysis 

The Relative Strength Index on the daily chart is below 30 – indicating oversold conditions and suggesting an upward correction. Nevertheless, downside momentum remains intact, and the pair is trading below the 50, 100, and 200-day Simple Moving Averages.

The chart implies a temporary correction before a fresh downturn.

1.2120 has been the initial post-crash low in late July and is a battle line. The fresh 2019low of 1.2076 – the lowest since January 2017 – is critical support. It is followed by 1.1985 and 1.1866 – both swing lows from over two years ago.

Some resistance awaits at 1.2250, which was a swing high in late July. The round number of 1.2300 worked as resistance in 2017 and should be watched. More importantly, 1.2380 was a low point in mid-July, and 1.2440 was a double-bottom beforehand. 

GBP/USD Sentiment

The pound may stage a recovery after the massive sell-off. Parliament is on recess, and traders may seek to take profits. However, unless the UK and the EU get closer – and no meeting is scheduled anytime soon – the overall trend remains to the downside, and Trump's tariffs also weigh.

The FXStreet Poll shows that experts are seeing additional drops for GBP/USD with a target below 1.2100. However,  they see a significant comeback and are ready for higher volatility. The medium and long term targets are elevated. Do they foresee a general election? A second referendum? 

Related Forecasts

• USD/JPY Forecast: May further fall fall after failing to fire up with the Fed, Trump's tariffs