GBP/USD Forecast: Correction over? Three reasons to expect sterling to turn south

Every trend has a countertrend – and these tend to be wilder in GBP/USD than in other currency pairs. Cable's sharp drop to five-month lows and the improving market mood have been behind the swift recovery. After a sell-off on Monday, stocks have been rebounding and demand for the safe-haven dollar has been diminishing. 

How long can the pound ride on dollar weakness? GBP/USD's upswing may hit roadblocks for three reasons:

1) Brexit

David Frost, the UK's Chief Negotiator, officially announced that Britain wants to reopen the Northern Irish protocol. He said that the signed agreement is causing problems, including empty shelves in supermarkets. The row did not wait for the end of the summer. 

The EU rejected any change to the hard-fought deal which was designed to prevent a border in Ireland, one that would endanger the Good Friday peace agreement. The Brexit accord consists of a customs barrier in the Irish Sea – separating Great Britain from the UK. 

Aggravated tensions could weigh on sterling.

2) Pingdemic

UK COVID-19 cases remain high – at over 40,000 per day, but at least they are not rising as a result of the grand reopening on Monday, at least for now. However, hundreds of thousands of Brits are being "pinged" every day by an application warning them of being exposed to somebody that tested positive to the virus. 

Those heeding the app's advice need to self-isolate, and that is causing staff shortages – including in supermarkets. Apart from fears that the UK would be forced to return to lockdown, the impact of this pingdemic could also drag the economy down. 

3) Mood swing

Monday's market sell-off is not necessarily over. Coronavirus cases continue rising all over the world, including in the US, the largest economy. If the trend continues, markets may have a rethink about the "buy the dip" move and take another plunge. 

In turn, the safe-haven US dollar could benefit from another boost, reversing GBP/USD's recovery even if sterling defies British concerns. 

US weekly jobless claims and ongoing infrastructure talks in Washington are also of interest, but they are overshadowed by the three issues above. 

GBP/USD Technical Analysis

Pound/dollar has exited oversold conditions according to the Relative Strength Index on the four-hour chart. However, that massive bounceback has still left the currency pair below the 50 and 100 Simple Moving Averages and momentum to the downside. Bears are still in control.

Some support awaits at 1.3730, the late-June low. It is followed by 1.3670, the broken double-bottom, and then by 1.3620, 1.3595 and finally 1.3570. 

Some resistance is at the daily high of 1.3758, followed by 1.38, a support line from last week. Further up, 1.3860 and 1.39 await the bulls.