GBP/USD Forecast: Hitting 1.30 seems out of reach as Brexit bring the pound back down

GBP/USD has risen after BOE's Bailey painted a relatively optimistic picture of the economy.
Brexit negotiations remain stuck and a breakthrough is unlikely this week.
Thursday's four-hour chart is painting a mixed picture.

Yohay Elam FXStreet

The sequel is usually less successful than the original – and in coronavirus' case, that is good news. Andrew Bailey, Governor of the Bank of England, said that he does not expect the economic impact of the second COVID-19 wave to be as in the spring.

The relatively upbeat assessment from the central banker is boosting the pound, helping it get closer to the promised land of 1.30. Can it finally break above that level? Not so fast.

First, Bailey also insisted that the BOE still has ammunition – a reminder that the "Old Lady" is examining the technicalities of setting negative rates, a specter that weighed on the pound in the past. In his interview with the Yorkshire Post, he added that coronavirus is adding significant uncertainty.

Second, the main theme for sterling remains Brexit – and news has been discouraging. According to reports, Britain is set to abandon talks if no progress is made by October 15, when the EU Summit begins.

This threat could be part of London's posturing, an attempt to push Brussels to concessions. Nevertheless, both sides are at loggerheads over state aid and fisheries – a sector worth less than 1% of the UK economy, but that has an outsized political impact. Talks will likely be extended beyond the next seven days, but such an announcement is unlikely now – and nor is a breakthrough on the sensitive issues.

Looking across the pond, there are indications for GBP/USD as well. The safe-haven US dollar has been on the back foot amid hopes that Republicans and Democrats will get together and agree on a new relief package. President Donald Trump cut off talks with the opposition back on Tuesday but has been suggesting ideas for a minimal accord later on.

However, Dems have no reason to let go amid broad public support for a large package, and with little time left until the elections. An adverse headline from Washington could boost the greenback.

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

On the other hand, generous fiscal relief is likely after the elections. Recent opinion polls have shown challenger Joe Biden enlarging his gap against President Donald Trump in critical battleground states and in national polls. A Fox News poll showed the former Vice President leading by 10%.

Biden's successor in the job, Mike Pence, clashed with Senator Kamala Harris in a relatively civil VP debate. While both candidates talked about the topics at stake, they did not present the cases for themselves. Both Trump and Biden are elderly men, and the VP may be forced to step in. Political analysts seem to disagree on who won the debate, but most conclude it will have little impact on the vote.

More: VP Debate Analysis: What we have learned about Pence and Harris

The Federal Reserve wants more fiscal stimulus but is reluctant to rock the boat ahead of the vote. The meeting minutes from the recent decision echoed recent messages – lower rates for longer, yet without imminent new monetary support.

The Fed and market will watch Thursday's main release – weekly jobless claims. A minor decrease in applications is on the cards, extending the gradual recovery from the crisis.

See US Initial Jobless Claims Preview: Unemployment filing and payrolls reverse in September

All in all, Brexit and fiscal stimulus headlines are set to rock the currency pair – and more likely to the downside.

GBP/USD Technical Analysis

Pound/dollar is benefiting from minor upside momentum on the four-hour chart and trades above the 50 and 100 Simple Moving Averages. On the other hand, if it fails once again in breaking above 1.30, bears could take over. The 200 SMA has dropped below that round level and could further cap the currency pair.

Some resistance awaits at 1.2980, which was a high point last week. It is followed by 1.30, and then by 1.3050.

Support awaits at 1.29, another round number that also provided support early in the week. Further down, 1.2850 was a low point on Wednesday and 1.28 served as a separator of ranges in late September.

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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