GBP/USD Forecast: Focus on the Fed after the Boris Johnson's backstop hopes fade

GBP/USD has been retreating from gains triggered by Brexit optimism.
The focus now shifts to US Fed Chair Jerome Powell's speech.
Friday's four-hour chart is pointing upwards.

Yohay Elam FXStreet

"We can find a backstop solution by October 31st" – This message by German Chancellor Angela Merkel has been keeping the pound bid. Merkel and French President Emmanuel Macron have expressed willingness to listen to potential solutions after meeting UK prime minister Boris Johnson.

Their readiness to hear about Johnson's "alternative arrangements" – which the EU previously rejected – sent the pound higher. GBP/USD hit 1.2275 – the highest in two weeks. Yet as we said, it seemed like a blame game and a selling opportunity on GBP/USD.

However, while Macron and Johnson were on friendly terms in their encounter on Thursday in Paris, the president also said that the backstop is "indispensable." Markets have begun realizing that there is a difference between "can find" and "will find" regarding the backstop and sent GBP/USD back down to around 1.2200 as the clock shows 69 days to Brexit.

The European move seems like part of the blame game upon a hard Brexit. The EU wants the world to know it is open to suggestions – only to reject them at a later date. Similarly, Johnson reiterated his stance that the UK will not erect a border on the island of Ireland – a preparation to accuse the EU of doing so.

The 1998 Good Friday Agreement has maintained the peace in the emerald isle, but an exit of the UK from the EU would necessitate customs controls – which would divide communities and create new tensions. Both sides want to avoid setting up a physical border. While the UK claims there could be technological solutions, the EU says these are far from ready.

Johnson will now meet Merkel, Macron, US President Donald Trump and others in the G-7 Summit. The gathering in Biarritz, southwestern France. For markets, Brexit and trade will top the agenda.

Have recent trade tensions shifted the Federal Reserve's thinking about its next rate decision in September? That is the main question for investors today. Fed Chair Jerome Powell will speak in Jackson Hole, Wyoming and markets are holding their breaths. In the past, central bankers have used the academic conference to signal the next policy moves.

Powell previously said that the rate reduction in July was only an "insurance cut" – meaning a pause in September – as the economy is doing well. Since then, Trump has announced new tariffs on China, the global economy has lost steam, and fears of a US recession are growing.

The Fed Chair speaks at 14:00 GMT and markets are set to rock. See the preview The audiences of Chairman Powell

GBP/USD Technical Analysis

On its way up, GBP/USD broke above the uptrend channel that accompanied it since last week – a bullish sign. The top of this channel now serves as support. At one point, the Relative Strength Index (RSI) was above 70, indicating overbought conditions. It has since dropped below this level – allowing for more gains. Momentum remains positive, and the pair is trading above the 50 and 100 Simple Moving Averages (SMAs).

Resistance awaits at 1.2250, which was a swing high after the crash. It is followed by 1.2275, the confluence of Thursday's high and the 200 SMA. Next, we find 1.2380 and 1.2420, which date back to July.

Support awaits at 1.2180, that capped cable earlier this week. It is followed by 1.2110, a low point this week. The weekly low of 1.2060 is next, followed by 1.2040, and 1.2015 – the 2019 low.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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