GBP/USD Forecast: Bears leading in battle between Boris' Brexit blues and bullish economy

• GBP/USD has been torn between hard Brexit fears and upbeat data.
• Fourth-quarter growth figures and US consumer data stand out.
• Early February's chart is painting a mixed picture. 
• The FX Poll is pointing to gradual gains for GBP/USD.

The week after, Brexit has seen a tug of war between concerns about post-Brexit EU-UK relations and upbeat data, reducing the chance of a rate cut. Quarterly GDP stands out in the UK as the coronavirus outbreak is set to continue grabbing headlines.

This week in GBP/USD: Strong PMIs battle Boris' Brexit

The party in parliament square has been followed by a hangover – after the UK officially left the bloc, Prime Minister Boris Johnson laid out his vision for EU-UK relations. In a defiant speech, the PM has said that he wants to break free from Brussels' rules.

On the other hand, Michel Barnier, the chief EU Negotiator, said that to achieve easy market access, Britain must align itself with the bloc. Both sides are also at odds on other topics such as the financial services industry.

The EU is reportedly considering removing concessions it made to the UK in the Markets in Financial Instruments Directive (MiFID) 2 regulations. That would be a punch to the UK's most prestigious industry. 

If both sides fail to reach a deal, the UK will fall back to World Trade Organization rules once the transition period expires at year-end. Official negotiations kick off only in March, but the pound plunged, and GBP/USD hit the lowest since December.

On the other hand, sterling surged in response to robust purchasing managers' indexes for January. Markit's forward-looking figures have shown that the construction sector contracted at a slower pace, manufacturing stopped squeezing, and that the all-important services sector is growing at a faster clip – a score of 53.9 against 52.9 reported initially. That sent cable to the other end.

GBP/USD has also been moving in response to the coronavirus outbreak, which has been grabbing the headlines. The disease has infected tens of thousands and claimed the lives of hundreds – yet mostly in China.

While the world's second-largest economy is struggling, hopes for containment and even a rapid cure or vaccine have allowed markets to recover. The US dollar tended to fall alongside bond yields while lousy news hit the newswires, and rise when the mood was improving. 

The greenback also moved higher in response to upbeat data. The ISM Manufacturing PMI surprised with a return to growth, hitting 50.9 points. ADP's private-sector jobs report even exceeded expectations with an increase of 291,000 positions. 

Non-Farm Payrolls beat expectations with 225,000 jobs gained in January, above early estimates but somewhat unconvicing after the ADP report. Wages were up only 0.2% monthly but surprised with 3.1% yearly. Overall, the US labor market is doing well, but this had already been priced into the dollar. 

UK events: Quarterly GDP and Brexit news stand out

Ahead of March's official talks, the UK and the EU may continue briefing the press – in front of cameras or behind the scenes –about their updated stances. Any hardening of positions may weigh on sterling and willingness to compromise – or the UK allowing for an extension of the implementation period – may boost the pound.

The economic calendar's highlight is the publication of quarterly Gross Domestic Product figures for the fourth quarter on Tuesday. After returning to growth with +0.4% in the third quarter, economists have high hopes for the last trimester of 2019 – a jump of 1%.

However, monthly figures for November severely disappointed with a 0.3% contraction, and a robust monthly leap of 0.5% would be needed to hit these forecasts. Nevertheless, that would only put yearly economic expansion at 1%. 

Jonathan Haskel, a member of the Bank of England – who voted to cut rates in January – will also be speaking on the same day. Will he express more optimism? 

The government published new forecasts on Wednesday, and it may also affect the pound, yet markets will likely await Friday's Retail Sales figures. UK shoppers decreased their spending volume in both November and December despite Black Friday and Christmas sprees. January has probably seen a rebound in spending. Another slide may hurt the pound. 

Here is the list of UK events from the FXStreet calendar:

US events: Coronavirus and the consumer eyed

Coronavirus headlines are set to continue rocking global markets. Investors will want to see a slowdown in the infection and mortality rate alongside the lifting of transport curbs. However, the situation may still become worse before it improves. 

The dollar will likely remain linked to bond yields, which in turn rise and fall with the global mood. Treasuries are in demand in times of trouble. However, this correlation can break, with the greenback returning to its classic safe-haven status.

The consumer stands out in this week's American forex calendar. The Consumer Price Index report is set to show a deceleration in annual Core CPI from 2.3% to 2.2% in January, raising the chances that the Federal Reserve cuts rates later this year. Any deviation in this critical figure may rock the dollar.

Friday features the Retail Sales report for January is forecast to show substantial increases in all gauges. The all-important Control Group – considered the "core of the core" – is expected to advance by 0.4% after 0.5% in December. 

The last word of the week belongs to the University of Michigan's preliminary Consumer Sentiment Index for February, which is predicted to remain close to 100. Upbeat confidence implies higher consumption.

Here the upcoming top US events this week:

GBP/USD Technical Analysis 

Pound/dollar is suffering from downside momentum on the daily chart and is trading around critical support – 1.29 is the confluence of the December low and the 100-day Simple Moving Average. This line is a critical inflection point. Momentum is to the downside while the currency pair trades above the 200-day SMA but below the 50-day one. The Relative Strength Index is balanced.

Below 1.29, the next support line awaits at 1.2820, which cushioned GBP/USD in November. It is followed by 1.2775, a low point earlier that month. 1.2705 and 1.2590 are next. 

Resistance is at 1.2950, which has provided support January and capped sterling in February. It is followed by 1.3010, which was a high point in October and worked in both directions afterward. 1.3075 was a swing high in early February, and 1.3210 was a peak in late January. 

GBP/USD Sentiment

The pound remains vulnerable to stark statements about Brexit and to weak figures – at least hard data. There is more room to the downside than the upside. 

The FX Poll is showing no substantial changes in the short term, and then gradual rises. Nevertheless, it is essential to note that the average targets have dropped in the past week, seemingly adjusting to the recent decline.

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