GBP/USD Forecast: Don't be fooled by the bounce – downtrend channel and hard Brexit loom

GBP/USD has escaped the abyss – but only just. The currency pair has been recovering after falling dangerously close to the all-important 1.2000 level on Friday. Sterling volatility remains high as the clock is showing only 80 days left until Brexit day – October 31st.

Parliament is on summer break until September 3rd, but MPs are trying to find ways to block a no-deal Brexit. One potential route is for the House of Commons to force the government to ask for another extension to Article 50 – postponing Brexit. The idea has arisen after reports suggesting that PM Boris Johnson will bypass parliament by calling elections on November 1st – just one day after exiting the EU.

The PM has the authority to set the date of the elections in case he loses a vote of no confidence. Labour, the main opposition party intends to table such a motion but may reconsider. Diane Abbott, the shadow home secretary, has said that a no-confidence vote is "an option" – refusing to commit to trying to topple Johnson in early September. 

It seems that the pro-Remain camp is short of options to stop the UK crashing out of the EU.

And while MPs are contemplating their next moves, the government has also been busy. Johnson has called off vacations and has been promising more spending – efforts that are seen as a preparation for elections. The PM will meet his Irish counterpart Leo Varadkar later this week amid low expectations for a deal. Ireland and the EU as a whole have reiterated that the Irish backstop must remain in the Withdrawal Agreement while the UK government would like to remove it. 

Elsewhere, trade tensions between the US and China have remained elevated. The People's Bank of China (PBOC) has set the yuan exchange rate at a lower level once again – but above market expectations. Markets see it as a sign of restraint, while rhetoric remains tough.

President Donald Trump has said that China is losing jobs and business to other countries and added that China "badly wants a deal." There are doubts that trade talks will resume as planned in September. The ongoing spat has raised expectations that the Federal Reserve will cut interest rates in September, weighing on the US dollar. 

Later this week, US inflation, retail sales, and consumer sentiment are eyed.

All in all, politics are set to dominate GBP/USD trading.

GBP/USD Technical Analysis

As the thick black lines on the chart show, GBP/USD is trading within a downtrend channel that began in late July. The pair is currently trading closer to the bottom end of this channel. The Relative Strength Index (RSI) has bounced above 30 – thus not indicating oversold conditions anymore. Momentum remains to the downside, and GBP/USD remains below the 50, 100, and 200 Simple Moving Averages. 

Overall, bears are in control.

Support awaits at the fresh 2019 trough of 1.2015 recorded on Friday. It is followed by the very round 1.2000 level and then by 1.1985, which has been a swing low in early 2017. Further down, the all-time low of 1.1866 awaits the pair.

Looking up, 1.2075 was the previous 2019 low recorded in early August and now works as resistance. It is followed by 1.2130, which provided some support last week. Next, we find 1.2210 that held cable down around the same time. Finally, 1.2250 was the post-crash peak seen in early August.