GBP/USD Forecast: Dead cat bounce? UK coronavirus and Brexit could end the pound's rise

  • GBP/USD has been rising as hopes for US fiscal stimulus are revived. 
  • Concerns about UK restrictions and Brexit could bring the pound back down.
  • Wednesday's four-hour chart is painting a moderately bullish picture. 

Schadenfreude – enjoying others' suffering – is unfortunately what many felt when hearing of President Donald Trump's positive coronavirus test. It also characterizes cable's trading. GBP/USD dropped when Trump abruptly announced that he is cutting off stimulus talks with Democrats, sending stocks down and the safe-haven dollar higher. 

The currency pair is now rising after the president – still recovering from the virus in the White House – tweeted a series of messages that seemed to backtrack that proclamation. Trump uses equities as a measure of his success and he may have realized the damage done. Moreover, the economy is one point where he is competing with rival Joe Biden. Recent polls have shown a growing chance of a devastating, landslide defeat for Trump.

More Who will be the next president? Markets seem to care more about Congress' actions (for now)

Apart from the hopes of stimulus, sterling has few reasons to rise. Prime Minister Boris Johnson is reportedly considering new restrictions to cope with rising COVID-19 infections. More and more cities in England and Scotland are slapping new measures on their residents. Will London undergo another lockdown? The mere speculation is already hurting the currency. 

Moreover, hopes for a Brexit breakthrough are diminishing. Simon Coveney, the Irish Foreign Minister who tends to be outspoken on the talks, said that the British stance on state aid is "very problematic." Moreover, France has pushed the EU toward a hard line on fisheries – a small industry whose political power is outsized in the UK. Overall, there is little going for the pound. 

The focus will later return to US fiscal stimulus talks. Jerome Powell, Chairman of the Federal Reserve, called on lawmakers to act just hours after Trump's announcement. The Fed will have another opportunity to impact markets via the release of its meeting minutes from the September decision.

The Fed pledged to keep interest rates at zero for a couple of years, but seems reluctant to increase its bond-buying scheme to provide further support. Any hints about futures moves could rock markets, yet the bank is unlikely to say anything that could be seen as intervention ahead of the elections. 

See US Federal Reserve Minutes Preview: Rate cuts, stimulus, and more stimulus

Vice-President Mike Pence and Senator Kamala Harris will meet in a televised debate late in the day. Both politicians are younger than the president and the former VP and may find themselves replacing their bosses, making the encounter more significant than previous ones. 

Contrary to his superior, Pence is calm and could provide a solid performance that would help Trump shore up some support. Harris, a former prosecutor, may give him a hard time on coronavirus, healthcare, and race relations, but the bar is low for Pence to win by just not being Trump. 

A tighter race means higher chances of contested elections and lower chances of a generous stimulus bill that Democrats could enact if they win a clean sweep. That could also boost the greenback and weigh on GBP/USD.

See VP Debate Preview: Preventing a landslide Trump loss? Pence may win Harris, narrowing the race

Overall, cable's current rise seems like a "dead cat bounce."

GBP/USD Technical Analysis

Pound/dollar benefits from upside momentum and has managed to rise above the 50 and 100 SMAs. However, repeated failures to break above 1.30 – reinforced by the 200 SMA – point to its limits. 

Resistance awaits at 1.2950, which was a high point last week, followed by 1.2980, a stepping stone on the way up this week. Above 1.30, the next line to watch is 1.3040. 

Support awaits at 1.2870, which is the daily bottom, followed by 1.2820, a swing low last week. The next levels to watch are 1.2755 and 1.2705. 

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