GBP/USD Forecast: Next stop, 1.40? Covid, Brexit and the Fed could result in further gains

Seven in a row – UK COVID-19 cases have dropped every day in the past week, providing hope that the worst of the Delta variant is over. The drop in infections reflects previous restrictions and is still limited to cases – hospitalizations are still high and deaths above the pre-strain levels. Moreover, the effects of Britain's grand July 19 reopening are still awaited. 

Nevertheless, seeing fewer cases is undoubtedly encouraging for Britain and the pound, but also for the entire world. The risk-on mood is weighing on the safe-haven dollar. 

The greenback will likely have another reason to fall when the Federal Reserve announces its decision later in the day. After kicking off the debate about tapering its bond-buying scheme in June, the world's most powerful central bank seems to be slowing down.

Despite the rise in inflation, Fed Chair Jerome Powell said that reducing purchases is still "a ways off," just two weeks ago. Powell and his colleagues still see rising prices as transitory and are also wary of the Delta variant.

On Tuesday, authorities recommended Americans to return to wearing face masks under certain conditions, a setback that the Fed undoubtedly took note of. Even if Britain's example is encouraging, uncertainty remains elevated.

If the Fed refrains from any hint of imminent tightening, the dollar could fall. 

Previews: 

• Federal Reserve Preview: Three reasons why Powell could pause, pummeling the dollar
• Fed Interest Rate Decision Preview: The horns of an inflation dilemma

Returning to the UK, sterling has another reason to shine, this time from the Brexit front. The EU has agreed to pause any legal action related to the Northern Irish protocol and its lack of implementation by Britain. The two sides were clashing over the topic and this summer lull is good news.

Overall, cable has room to extend its climb.

GBP/USD Technical analysis

Pound/dollar is trading in an upward channel, as the four-hour chart shows. On its way up, it surpassed the 200 Simple Moving Average and benefits from upside momentum. The only potential halt to the rally is the fact that the Relative Strength Index (RSI) is near 70 – about to enter overbought conditions.

Resistance awaits at 1.3895, the daily high, followed by 1.3930, which held it down several weeks ago, and finally by the psychologically significant 1.40 level. 

Support is at 1.3830, a cap from earlier this week, followed by 1.375 and 1.3725. 

See Analyzing inter-market correlations to see if reflation trade is coming to an end – July 2021