GBP/USD Forecast: Barnier and overbought conditions may pause the massive Brexit rally

"A pathway to a possible Brexit deal" – the words that kicked off a massive 250-pip pound rally after talks looked doomed to fail earlier this week. UK Prime Minister Boris Johnson and the Irish taoiseach Leo Varadkar spent some three hours in a wedding venue outside Liverpool and discussed details of a divorce deal. The official statement only includes hopes, a commitment to hold consultations at home, and a decision to resume talks in Brussels today. 

Various media reports suggest the contours of an accord to resolve the issue of Ireland – allowing the UK to exit the EU's customs union while keeping an open border on the isle of Ireland. One option is for a Free Trade Agreement (FTA) to replace parts of the Brexit agreement, known as the Withdrawal  Agreement (WA). The details of that idea remain unclear, but new a new branding to the Irish backstop – hated by Brexit hardliners – would probably help Johnson. Another option is that Northern Ireland *NI) leaves the EU customs union with the rest of the UK, but continues following its rules. That is also somewhat vague.

While Varadkar spoke to the press, Johnson and his team at 10 Downing Street have remained tightlipped. Pat Leahy, an Irish journalist, has hinted that the UK made significant concessions. The UK PM may want to take his time in preparing his Conservative Brexit-supporting peers and the Northern Irish Democratic Unionist Party (DUP) fro a climbdown. The DUP opposes having a separate economic regime for NI – the union of the UK is its core principle. 

We may learn more details on today's Brexit talks led by UK Brexit Secretary Stephen Barclay and Chief EU Negotiator Michel Barnier. The French statesman has been critical of the UK's approach and is seen by London as a barrier to reaching an accord. If Barnier rejects Barclay's proposals, sterling may suffer a sell-off. However, the EU will likely eventually go along with a solution to Ireland if Varadkar gives it the seal of approval.

If talks in the Belgian capital advance and details are released, the key to GBP/USD's next moves hinges on responses back in London. Parliament must approve the accord, and MPs may be quick to criticize it. A special session of the House of Commons is scheduled for Saturday, October 19, just after the EU Summit on October 17-18.

More Brexit: Three scenarios and GBP/USD price targets as B-Day approaches

Beyond Brexit

Apart from headlines from the talks in Brussels, GBP/USD is set to rock on reports from US-Sino negotiations. President Donald Trump has been pleased with talks and will meet Chinese Vice Premier Liu He – who leads the delegation – late in the day. A partial deal to calm tension and prevent further tariffs s is on the cards.

Traders will also be watching the University of Michigan's preliminary Consumer Sentiment Index for October. See US Michigan Consumer Sentiment Preview: Concerns about the future are driving the decline in sentiment

GBP/USD Technical Analysis – Overbought

The Relative Strength Index (RSI) on the four-hour chart is above 70 – indicating overbought conditions – and implying a correction. Other indicators are upbeat. Cable's massive rally pierced through the 50, 100, and 200 Simple Moving Averages, and upside momentum is accelerating.

The recent peak of 1.2470 is the first resistance level to watch. It is followed by the round number of 1.25, which held GBP/USD down in late September. 1.2525 was a stepping stone on the way up in mid-September, and 1.2580 was the high point in September. 

Support awaits at 1.2415, which separated ranges in early October and late September. Next, we find 1.2345, which capped GBP/USD at the end of September. Lower, 1.2290 was a swing high on Wednesday, and 1.22 provided support during the week.