GBP/USD Forecast: Bailey blinks, Brexit bonhomie ebbs, breakdown coming?

  • GBP/USD has been falling as BOE Governor Bailey seems open to negative rates. 
  • EU-UK, Sino-American relations, and data are set to move the currency pair.
  • Thursday's four-hour chart is painting a mixed picture. 

"Under active review"  – In typical British understatement, negative interest rates now seem imminent. Andrew Bailey, Governor of the Bank of England, also told MPs that he had changed his opinion on the topic during the pandemic. The governor's change of heart weighed on sterling, which was unable to take advantage of the dollar's decline on Wednesday. 

Another adverse development is the growing row in Brexit talks. Michel Barnier, the Chief EU negotiator, said that the recent British tone is undermining trust. The French statesman responded to his UK counterpart's claim that Brussels was offering a "low-quality deal." 

Is this the darkest before dawn? Time is running out before both sides can agree to extend the transition period beyond year-end, and perhaps the last-minute public squabble will be replaced by intense videoconferences to reach an accord. However, the current lack of bonhomie is adding to pressure on the pound. 

Markit's preliminary Purchasing Managers' Indexes for May bounced from April's devastating figures and even exceeded expectations. The manufacturing PMI jumped from32.6 to 40.6 and the services PMI more than doubled from 13.4 to 27.8 points. It is essential to note that any score under 50 represents contraction.

The safe-haven US dollar has been on the back foot on Wednesday amid an upbeat market mood originating from the Federal Reserve's commitment to supporting the economy. The bank's meeting minutes reiterated this stance and offered little new after repeated appearances by officials such as Jerome Powell, Chairman of the Federal Reserve. 

The mood changed as Sino-American relations worsened. President Donald Trump accused China of a disinformation campaign and added that it "comes from the top" – straying away from his previous preference not to attack his counterpart Xi Jinping. Moreover, both Republicans and Democrats have advanced bills scrutinizing Chinese activity. The clash between the world's largest economies sent stocks down and the greenback up.

Several US data points will shed more light on the economic situation. Jobless claims are set to decline once again, albeit remain in the millions. Markit's PMIs will likely show a bounce in the services sector, similar to the US. Perhaps the most interesting data point on Thursday is US Existing Home Sales, which will show the effect of coronavirus for the first time. 

In both countries, COVID-19 cases and deaths are declining, albeit at a frustratingly slow rate. However, testing has been ramped up.

All in all, a busy day awaits cable traders.

GBP/USD Technical Analysis

Pound/dollar has dropped below the 50 Simple Moving Average on the four-hour chart yet momentum remains to the upside, balancing the picture. The currency pair trades below the 100 and 200 SMAs and the Relative Strength Index is balanced.

Support awaits at 1.2165, a former double-bottom that provided support last week. Further down, the May trough of 1.2075 is the next level to watch ahead of the round 1.20 line. 

Some resistance is at 1.2220, which cushioned the pair on Wednesday. It is followed by 1.2270, which was a swing low in early May. Further up, 1.23 is the next level to watch.

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