GBP/USD Forecast: More falls possible as hard Brexit reality bites

GBP/USD has been losing ground as optimism about a Brexit deal fades.
The US-Sino trade war and the UK's exit from the EU are set to dominate trading today.
Monday's four-hour chart is pointing to limited gains.

Yohay Elam FXStreet

"I still hope prime minister Boris Johnson will not like to go down in history as Mr. No Deal," – said Donald Tusk, President of the European Council. The Polish statesman added that there would be no "mini-deals" following a hard Brexit.

His words, early on Saturday, contradicted the positive response that the British leader received from German Chancellor Angela Merkel and French President Emmanuel Macron last week. Both showed a willingness to listen to new proposals regarding the Irish backstop – but said the onus was on the UK. Johnson hit back by saying that Britain wants a deal and blamed the EU for potentially leading to a hard exit.

Apart from that clash, Johnson also hinted that Britain would withhold the £39 billion it agreed to pay the EU upon leaving the bloc – the "divorce bill." European MP and Brexit Coordinator Guy Verhofsdat responded that paying the bill would be the first condition to talk after a no-deal Brexit.

To top it off, the Observer reported that Downing Street has asked for legal advice about closing parliament for five weeks in order to ram through a hard Brexit.

British traders are enjoying a bank holiday, but the pound is already moving – falling from the highs it reached on Friday. Just before the weekend, the US-Sino trade war intensified. China announced new tariffs in response to those planned by the US in September and in December. President Donald Trump responded by announcing higher duties from October. Moreover, the president called American companies to leave China.

The escalation sent bond yields lower – raising the odds for the Federal Reserve to cut rates next month. And indeed, Fed Chair Jerome Powell opened the door to reducing rates once again. He noted the "eventful three weeks" since the bank cut rates in July – the first such move in over a decade.

Falling bond yields weighed on the US dollar, allowing GBP/USD to gain. That combination of Brexit optimism and a weaker dollar has been fading amid recent Brexit developments and fresh hopes that Washington and Beijing can still find a path to de-escalate tensions. Trump has said that both sides have been talking. Also, it is essential to note that the new round of levies is due for September 1st – leaving time for another trade truce.

Fresh figures from the US economy are due later in the day. Durable Goods Orders have likely moderated in July.

See US Durable Goods Orders Preview: Business and consumer spending diverge

Overall, Brexit and trade will likely set the tone, with US figures only temporarily diverting attention.

GBP/USD Technical Analysis

GBP/USD continues trading above the uptrend channel it broke above last week. Moreover, the currency pair continues enjoying upside momentum on the four-hour chart and trades above the 50 and 100 Simple Moving Averages. It has failed to top the 200 SMA for now. All in all, the technical picture is positive.

Resistance awaits at 1.2294, which is the peak seen on Friday. Next, we find 1.2380 that provided support in mid-July, followed by 1.2420 that held GBP/USD up later that month.

Support awaits at 1.2200 that worked as support on Friday, followed by 1.2120, which was a support line late last week. Next, we find 1.2065 and 1.2015.

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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