GBP/USD Forecast: British pound to struggle to rebound as Brexit tensions escalate

GBP/USD has failed to break above 1.3500 on Friday and started the new week on the back foot amid renewed Brexit tensions following the Bank of England's (BoE) dovish surprise. Unless the pair manages to make a daily close above 1.3500, recovery attempts are likely to remain limited in the near term with fundamental drivers staying bearish.  

In an interview with Bloomberg TV, BoE Governor Andrew Bailey reiterated that it's not their job to steer financial markets on interest rates. Following the BoE's November's decision to leave the policy rate unchanged, the British pound suffered heavy losses against the greenback. Although the CME Group's BoEWatch Tool currently shows that markets are pricing a nearly 70% chance of a 20 basis points rate hike in December, GBP/USD is still having a tough time erasing its losses.

Reescalating Brexit tensions seem to be forcing investors to adopt a cautious stance.

Commenting on reports claiming that the UK could trigger Article 16, Ireland’s Foreign Minister Simon Coveney told RTE News on Sunday that Britain was “deliberately forcing a breakdown” over Brexit's Northern Ireland Protocol. Coveney further added that the EU could suspend the entire Brexit deal in case the UK were to trigger Article 16. 

There won't be any high-tier macroeconomic data releases featured in the US economic docket in the remainder of the day. Several FOMC policymakers are scheduled to speak on Monday but their comments are unlikely to be significant enough to alter the Fed's policy outlook. 

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart is staying close to 40, suggesting that Friday's rebound was a reaction to the pair's oversoldness. On the upside, 1.3500 (static level, psychological level) aligns as initial resistance ahead of 1.3570 (Fibonacci 61.8% retracement) and 1.3630 (Fibonacci 50% retracement). A daily close above 1.3500 could open the door for additional gains but the pair would need fundamental developments to convince investors that it had reversed its trend.

Supports are located at 1.3400 (psychological level, static support, 2021 low) which aligns as the first target before 1.3360 (static level) and 1.3300 (psychological level).