GBP/USD Forecast: Boris Johnson's by-election defeat may turn pound-positive

The vacation month of August usually features hot weather and a calm atmosphere – but the mood is anything but calm as markets are suffering the heat of political developments. The Conservative Party has lost the Brecon and Radnorshire by-election to the staunchly pro-Remain Liberal Democrats. The little-known Welsh region has an amplified impact not only due to the fierce Brexit debate but also as the Conservatives majority has shrunk to only one seat.

PM Boris Johnson will now face a tougher challenge in parliament – whatever he may want to pass. However, today's result may increase the chances of general elections – in which the pro-Remain camp may win. The Lib-Dems have already been on the rise after Jo Swinson's election as leader, and their momentum may pull Labour closer to a pro-Remain stance. Markets would like the UK to stay in the EU – or at least avoid a hard Brexit.

On Thursday, the Bank of England has refused to say what it thinks about the odds of a no-deal Brexit and maintained its assumption of a smooth exit from the EU. The BOE's stance contradicts the growing chances of a hard crash from the bloc that sterling has been reflecting in recent days. It also stands in contrast to concerns that businesses express through Markit's forward-looking surveys. Both the manufacturing and the construction purchasing managers' indices have come out below 50 – reflecting contraction.

The second summer storm comes from the US. The trade front seemed calm after the US and China said that talks were constructive and scheduled new ones for September. However, President Donald Trump has broken the expected summer lull by announcing a 10% tariff on $300 billion worth of Chinese goods from September 1st. He has accused China of slow-walking the talks and for failing to fulfill the promise to buy agricultural goods.

The news sent shivers in stock traders' spines and triggered demand for safe-haven US bonds. In turn, lower yields weighed on the USD. The move – just one day after the Fed warned about trade tensions but refused to signal more rate cuts – may arguably force the Fed to act. 

The focus now turns to the US Non-Farm Payrolls. A return to normal job growth is projected after several months of upside and downside surprises. Wages may have a greater impact than usual due to the Fed's concerns about the weakness of inflation. 

While choppy trading is likely, attention may swiftly return to Trump's trade wars.

• Non-Farm Payrolls Preview: Focus on wages in a dollar-friendly setup
• US Non-Farm Payrolls Preview: Look back, no one is gaining

Overall, international and UK politics will likely dominate.

GBP/USD Technical Analysis

GBP/USD is experiencing lower lows as well as lower highs – a choppy downtrend. The Relative Strength Index on the four-hour chart is leaning lower but holds above 30 – thus not indicating oversold conditions. Downside momentum has weakened but remains prevalent.

All in all, the bears are in control.

Some support awaits at the initial post-crash low of 1.2120. The next cushion is 1.2076 – the lowest level since January 2017 recorded on Thursday. 1.1985 and 1.1866 are next.

Some resistance awaits at 1.2190 which temporarily capped cable after the crash. The high of 1.2250 is next. Further above, the pre-crash support line of 1.2380 now works as resistance.