GBP/USD Forecast: Brexit recession fears are becoming real – pound recovery at risk

Blame it Brexit or call it temporary – the UK has squeezed for the first time since 2012 and an outright recession is a real risk. The UK reported Gross Domestic Growth (GDP) dropped by 0.2% in the second quarter, worse than expectations – which foresaw stagnation. The downfall in the second quarter followed a robust 0.5% expansion in the first one – due to stockpiling ahead of the original Brexit date of March 29th. The payback quarter has now hit harder than optimists had hoped for.

GBP/USD has dipped below 1.2100 but fell short of the 2019 low of 1.2075. Nevertheless, the data do not bode well for the economy – especially the 1.4% yearly contraction in manufacturing – a sector that was supposed to benefit from the lower sterling exchange rate.

The figures have temporarily taken attention away from politics. The British press is speculating what PM Boris Johnson may do in case he loses the confidence of parliament. Johnson and Dominic Cummings – senior adviser and mastermind of the Vote Leave campaign – may be contemplating to bypass parliament by setting elections for after Brexit. The deadline is currently October 31st and some suggest Brits could go to the polls on the following day – November 1st. 

The House of Commons is currently enjoying the summer break and tensions are already high ahead of its return on September 3rd.

On the other side of the pond, trade tensions remain elevated as the US has refused to grant Huawei – the Chinese telecom giant – licenses. The administration step is a response to China's decision to halt purchases of American agrifoods and to China's devaluation of the yuan.

The People's Bank of China has lowered the renminbi's value once again, but by less than markets anticipated. US President Donald Trump has expressed his desire for a weaker dollar, tweeting that he is "not thrilled" by its current strength. 

The greenback has been weakening alongside the fall in US bond yields – which reflect growing chances of the Federal Reserve cutting interest rates in September. 

With UK GDP out of the way, politics on both sides of the Atlantic return to center stage for cable traders.

GBP/USD Technical Analysis

GBP/USD has dropped below the 50 Simple Moving Average on the four-hour chart once again. Momentum is leaning lower and the currency pair has also lost the uptrend support line that is part of the channel it was trading within. 

All in all, the chart points to further falls.

The next support line is 1.2075 – the 2019 trough and the lowest since January 2017. Below the round number of 1.2000, support awaits at 1.1985 and 1.1866, which have both been flash crash lows around the end of 2016 and in early 2017.

Some resistance awaits at 1.2135 which provided support earlier this week. 1.2210 is the weekly high, and 1.2250 held GBP/USD down after last week's crash. Next, we find 1.2380 and 1.2420.