GBP/USD Forecast: A rally like no other still faces a reality check

  • Barnier announcement of a special deal sent the Pound shooting higher.
  • Brexit developments and PMI data will set the tone for the week.
  • The technical picture is balanced for the pair. The FX Poll shows a bullish bias for the short term.

This was the week - Barnier breakout

Chief EU Negotiator Michel Barnier, which usually portrays a tough image, surprised markets on Wednesday. He said that the EU is ready to offer Britain a "deal like no other country" post-Brexit. The news sent Sterling soaring.

However, the dearth of details and some more cautious words on Thursday suggest that the negotiations are far from over. The deadline for reaching an accord may be pushed back to November, leaving little time until the March 29th deadline for Brexit.

Analysis: GBP/USD: Three reasons to fade the Barnier breakout - selling opportunity?

The US Dollar moved in an inverse correlation to the market mood. A deal between the US and Mexico improved the atmosphere and sent the greenback lower. Concerns about tariffs on China and the crash of some emerging market currencies lifted the US Dollar.

US GDP beat expectations with an upgrade to 4.2% annualized in Q2. Other data were more mixed. 

British events: Carney, PMI data kick off the month

Summer is ending, and Markit's three purchasing managers' indices kick off the week. Monday sees the Manufacturing PMI which was OK at 54 points in July. The manufacturing sector enjoyed a weaker pound for exports. Construction PMI is due on Tuesday, and a drop is expected.

The essential PMI is for the services sector, which includes the all-important financial services sector. It disappointed with 53.5 points in July and bounce is on the cards for August. Brexit concerns may push it lower.

Bank of England Governor Mark Carney will testify alongside several of his colleagues on Wednesday. The Treasury Committee will discuss monetary policy, inflation, wages, growth, and Brexit of course. In a previous appearance, Carney stressed that there is a high level of uncertainty. It will be interesting to hear if his tone changes after the recent developments. He may also be asked about the reports, later denied, about extending his term.

There are a few additional events to note, including the Halifax House Prices. However, any headline coming out of the continuous Brexit negotiations, either from Barnier, UK Brexit Minister Dominic Raab, or higher ranking politicians, will be of interest. 

Here are the UK events lined up on the economic calendar:

UK economic calendar events September 3 7 2018

US events: Trade with China and the NFP

The first week of the month features the all-important jobs report. Headline Non-Farm Payrolls disappointed with an increase of only 157,000 jobs in July. A more significant rise is on the cards for August. Wages also carry higher expectations: an acceleration from 2.7% to 2.8% YoY.

Ahead of the jobs report on Friday, the ISM PMI's provide hints, and they are forecast to pick up after retreating in July. The ADP NFP on Wednesday serves as an additional warm up to the official BLS report on Friday. 

Nevertheless, despite having top-tier data, there is a considerably more critical event expected in the wake of September. The US is set to escalate the trade war with China, slapping tariffs on $200 worth of goods. The recent round of duties reached $50 billion. China will be unable to respond in precise tit-for-tat measures and will likely impose levies on $60 billion of US imports while potentially finding other ways to hurt American companies.

If the move goes through, the US Dollar is likely to gain. A delay or a deal can send the greenback lower. Things come to a head on Thursday and Friday, but trade-related headlines will likely appear beforehand.

Analysis: Trade wars: $200 billion is serious, 3 scenarios and currency reactions for the upcoming escalation

Here are the significant US events as they appear on the forex calendar

GBP/USD Technical Analysis

The GBP/USD is trading alongside an uptrend support line and enjoyed a lift-off. It hit the descending 50-day Simple Moving Average. The Relative Strength Index (RSI) is balanced while Momentum is weak. 

1.2980 was a low point on August 30th. Further down, 1.2935 held the pair down on several occasions in late August. 1.2850 was a low point before the most recent surge. 1.2800 is a round number that also served as support in mid-August. Lower, 1.2730 and 1.2760 were the limits of a narrow range in mid-August.

1.3040 was a high point on August 30th and also coincides with the 50-day Simple Moving Average. 1.3080 provided support to the pair in late July and early August. 1.3175 was a swing high in late July, and 1.3220 had a similar role around the same time. 

GBP USD technical analysis September 3 7 2018

GBP/USD Sentiment

It is easier to fade the Barnier rally than to buy, at least until we get some details. It is hard to see the EU climb down, and a British climb down could tear the government apart. Also, unless there is a last minute surprise, the US tariffs on China could disrupt the global economy and sent the USD higher. All in all, there is more room to the downside than to the upside.

The FXStreet forex poll of experts shows a bullish bias in the short, a bearish one afterward and a bullish one for the long -term. Forecasts have been upgraded for the short and and medium terms but lowered for the long-term.

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