GBP/USD Forecast: No-deal Brexit concerns continuously weigh on Sterling

• With no economic data out this week, Brexit concerns took over pressing Sterling to fresh 1-year lows.
• The UK Q2 GDP data are set to see the UK economy expanding 0.4% Q/Q on Friday.
• The GBP/USD is now capped below 1.2870 resistance zone that has previously served as support.

The GBP/USD is trading down 0.25% at around 1.2850 against the US Dollar as a no-deal Brexit factor dominated the market sentiment in the absence of the strong economic data. The only fundamental piece of news is scheduled for Friday with Q2 GDP in the Uk expected to rise 0.4% over the quarter, double the rate recorded in the first three months of this year. 

With Brexit developments put on the backburner for the next few weeks with the UK parliament on recess until September 5th and while Barnier indicated that the Withdrawal agreement will not be finalized without a solution to the Irish backstop, the market sentiment is driven by random comments of Brexit future.

The market noise on Brexit includes Wednesday’s news of the UK government readying the meeting for mid-September to prepare plans for a no-deal Brexit scenario and comments from UK Trade Secretary Liam Fox who said on Monday that a no-deal Brexit has a 60% chance of happening.

The Bank of England officials also voiced their Brexit concerns recently. The Bank of England Governor Mark Carney said that the uncertainty related to Brexit negotiations is “uncomfortably high” and the Monetary Policy Committee outgoing member Ian McCafferty pointed out that no-deal Brexit would cause short-term economic disruption and that the market expectations for a couple of rate hikes during the next two years are acceptable.

The frame for Brexit uncertainty is made of dovish monetary policy outlook from the Bank of England that has raised the Bank rate to 0.75% last week, but also said any further policy adjustments will only be gradual and limited. This is priced-in with rates at 1.0% in Q1 2020 and then edging higher to 1.1% by Q3 2021.

The GBP/USD is now moving within the downward sloping trend channel with the currency pair breaking below 1.2870 on no-deal Brexit fears. Technical oscillators like the Momentum are rather neutral pointing upwards, but the Relative Strength Index and Slow Stochastics both creep around the oversold territory. While GBP/USD is capped below 1.2870 representing 61.8% replacement of the recovery of Sterling from post Brexit low of 1.1940 to the cyclical high of 1.4377, further selling is seen taking GBP/USD towards 1.2800 before testing 1.2750 and ultimately reaching 1.2670 representing 23.6% Fibonacci retracement of a post-Brexit slump from 1.5020 to 1.1940.

GBP/USD 4-hour chart