GBP/USD Forecast: Brexit may end this trade-fueled dead cat bounce

The pound is recovering – but mostly against the US dollar – and this may be unsustainable. The US-Sino trade war has intensified with the US labeling China as a currency manipulator in response to the latter's devaluation of the yuan to the lowest levels since 2008. The growing divide between the world's largest economies has sent stocks plunging and bonds rallying.

US treasuries now reflect high chances of a rate cut or even two in the next Federal Reserve decision in September – weighing on the US dollar. Fed Governor Lael Brainard has said she is "monitoring developments closely." Comments from Fed officials are eyed today.

GBP/USD has topped 1.2200 and is already some 120 pips above the two-year lows. However, its recovery has been limited r a "dead cat bounce" pattern.

What is next?

Greater Brexit uncertainty

While the trade rhetoric may further escalate, the UK has issues of its own – Brexit. European diplomats have been briefed that UK PM Boris Johnson is uninterested in renegotiating the Brexit deal. According to reports, the EU is now seeing a no-deal exit as the main scenario. Earlier, the bloc rejected calls to open the accord but was hoping for a solution. 

Not all in the EU are waiting for an inevitable no-deal Brexit. According to the media in Germany, the government of the continent's largest economy is getting ready for Johnson to call snap elections. That is also the view of a growing chorus of political analysts in the UK. The PM has not only hardened his Brexit stance but has also been offering fresh public spending – especially to the National Health Service (NHS).

The recent moves are seen as part of a campaign rather than part of a long-term policy. Elections cause uncertainty and limit the scope for any talks as politicians focus on the polls – and that adds to pressures. 

In the meantime, the British Retail Consortium has reported the worst July for retailers since records began. The trade association's figures have shown the economy is losing ground but are yet to confirmed by the official report later this month. 

All in all, sterling has few reasons to rise and may turn lower once the tide turns around trade.

GBP/USD Technical Analysis

GBP/USD has broken above downtrend resistance that has capped it in recent days. Momentum on the four-hour chart has turned positive. However, the currency pair trades below the 50, 100, and 200 Simple Moving Averages and remains below the post-crash recovery high of 1.2250. 

All in all, it is not out of the woods just yet.

Support awaits at 1.2120 which was the initial post-crash low. Lower, we find 1.2075 that is the 2019 trough. Further down, we find 1.1985 and 1.1866. 

Some resistance awaits at 1.2225 which is where the 50 SMA meets the price. The post-crash recovery peak of 1.2250 is next. Further up, 1.2380 and 1.2420 await it.