GBP/USD Forecast: At the edge of critical support as Brexit reality bites

GBP/USD has been falling in response to weak UK data and USD strength.
Comments from the leadership candidates and US data are set to dominate price action.
Monday's four-hour shows pound/dollar at critical support.

Yohay Elam FXStreet

Brexit has been taking its toll on the UK economy – and it is yet to happen. Markit's manufacturing purchasing managers' indicator for June has dropped to 48 points from 49.4 in May and reflects a deeper contraction in the sector. The forward-looking survey has weighed on Sterling.

Some British companies may even go bankrupt in case of a no-deal Brexit and UK foreign secretary Jeremy Hunt has said that such firms will "understand the sacrifice" – angering businesses. Hunt – who is trailing Boris Johnson in the Conservative party's leadership contest – is seemingly trying to ramp up his Brexit credentials within the party. His comments have also weighed on the pound.

Both Johnson and Hunt will be speaking later today and may influence Sterling.

Concerns about the UK's exit from the EU are not the only culprits in GBP/USD's fall. The US dollar has gained ground following the trade truce that US President Donald Trump has reached with his Chinese counterpart Xi Jinping. The leaders of the world's largest economies have agreed to resume trade talks and refrain from slapping new tariffs. In response, investors have reduced their bets on a significant rate cut from the Federal Reserve later this month – pushing the greenback higher.

Later today, the US ISM Manufacturing PMI will provide an indication about the state of America's manufacturing sector and serve as a hint toward Friday's jobs report.

See US Manufacturing PMI Preview: Trade is the measure of all things

GBP/USD Technical Analysis

GBP/USD is challenging 1.2640 which has been a swing low early last week and also capped it late May – a critical support line. The currency pair traded below 1.2640 only for a short time in mid-June.

On its way down, Sterling plunged through the 50, 100, and 200 Simple Moving Averages. Downside momentum is accelerating and the Relative Strength Index is pointing lower yet holds above 30 – still outside oversold conditions.

Further support awaits at 1.2605, which temporarily capped it in mid-June and provided support beforehand. 1.2545 was a stepping stone on the way up and the last line to watch is 1.2505 – June's trough and the lowest since January.

Some resistance awaits at 1.2660 which has capped GBP/USD in recent days. It is followed by 1.2740 that was a swing high last week and 1.2780 – June's high.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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