GBP/USD Forecast: Not out of the woods yet, focus remains on Brexit talks/US presidential debate

• A combination of factors prompted some aggressive short-covering around GBP/USD.
• The key focus will remain on the first US presidential debate, scheduled this Tuesday.
• The incoming Brexit-related headlines will also be looked upon for some trading impetus.

The GBP/USD pair witnessed some aggressive short-covering move on the first day of a new trading week and was being supported by a combination of factors. The British pound's strong outperformance was fueled by the optimism over a breakthrough in this week's Brexit trade negotiations. Reports indicated that the two sides remain optimistic that some kind of a deal will be struck before the very important EU summit in mid-October. The UK PM spokesman reinforced market expectations and said that a Brexit agreement was still possible. The spokesman, however, added that there are significant gaps and the EU must adopt a more realistic policy position.

The sterling got an additional boost after the Bank of England (BoE) policymaker, Dave Ramsden, downplayed the possibility of negative interest rates in the short-term. In an interview with the Society of Profession Economists, Ramsden was noted saying that he still sees the effective lower bound in the bank rate at 0.10%. He further said that the central case sees GDP recovering steadily but there are real uncertainties and risks from the pandemic, Brexit and the US election. BoE is ready to act further if needed. This, along with some US dollar profit-taking, pushed the pair to one-week tops, or levels beyond the 1.2900 round-figure mark.

Upbeat Chinese data released over the weekend and optimism over additional US fiscal stimulus triggered a strong rally in the global equity markets. The risk-on mood dented the greenback's perceived safe-haven status and remained supportive of the pair's intraday positive move of around 180 pips. However, worries about a surge in new COVID-19 infections and political uncertainty in the US helped limit the USD pullback. Investors remain concerned about a smooth transfer of power if President Donald Trump losses the election in early November. Hence, the key focus will be on the first presidential debate, scheduled later this Tuesday.

Apart from this, the incoming headlines from the ninth and the final round of Brexit talks, starting this Tuesday, will influence the sentiment surrounding the British pound and further contribute to produce some meaningful trading opportunities.

Technical levels to watch

From a technical perspective, the overnight rally could be solely attributed to some short-covering from a technically significant moving average (200-day SMA). The lack of any strong follow-through buying and a subsequent pullback of around 100 pips points to the prevalent selling bias at higher levels. Hence, any move back towards the 1.2925-30 region might still be seen as a selling opportunity. This, in turn, should continue to cap the pair near the key 1.3000 psychological mark. Only a sustained move beyond will negate any near-term bearish bias and pave the way for additional gains.

On the flip side, the 1.2800 mark now seems to protect the immediate downside and is closely followed by the 1.2775 horizontal support. Failure to defend the mentioned levels would turn the pair vulnerable to slide back towards the 1.2700 round-figure mark (200-DMA). Some follow-through selling below the recent swing lows, around the 1.2675 level, will set the stage for the resumption of the downward trajectory. The pair might then accelerate the fall further towards mid-1.2500s before eventually dropping to the key 1.2500 psychological mark.