GBP/USD Forecast: Oversold conditions set to pause pound's pounding, probably only temporarily


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  • GBP/USD has been extending its falls amid Brexit and coronavirus concerns.
  • US fiscal stimulus talks and further political developments are eyed.
  • Wednesday's four-hour chart is pointing to significantly oversold conditions.

"This does break international law" – That confession by Brandon Lewis, the UK's Northern Ireland Secretary, adds fuel to the Brexit fire and pushing the pound lower, exacerbating the sell-off.

Prime Minister Boris Johnson's government is pushing through legislation that would violate the Withdrawal Agreement signed with the EU last year. It changes several aspects of dealings in Northern Ireland, including sensitive customs checks. The full details are due out later on Wednesday, but markets are already moving.

Talks between London and Brussels have been stuck for months. Johnson set October 15 as a deadline for reaching a trade deal, six weeks ahead of the end of the transition period while France said that without an agreement aligning trade regulations – a "level-playing field" – there can be no progress. The NI legislation is a setback reopening the previous agreement rather than moving forward to a new one.

Sterling is also suffering from rising coronavirus cases in the UK – that have prompted the government to limit gatherings to only six people. Nighttime curfews in specific places are also considered. 

UK COVID-19 cases are spiraling higher:

Source: FT

Broader markets are worried about another coronavirus-related issue – AstraZeneca has halted its COVID-19 vaccine trial after one patient fell ill. While such pauses are normal in such experiments, the setback – even if temporary – is weighing on markets. The safe-haven dollar is on the rise.

The British pharma firm's project with the University of Oxford is considered one of the most advanced among nearly ten Phase 3 trials. Further developments about the patient's illness and its correlation with the immunization candidate are awaited. 

President Donald Trump has been pinning part of his reelection hopes on securing a vaccine before the November 3 vote. He continues trailing rival Joe Biden by around 7.5% in opinion polls, which have been steady. Markets are worried about an inconclusive result but have other political issues to cope with.

Democrats and Republicans remain far apart on a fiscal stimulus deal. The GOP offered a relief package worth less than $1 trillion, which the opposition described as "meager" and an "insult to Americans' intelligence." America's upbeat jobs report for August – showing the unemployment rate fell to 8.4% – may have lowered lawmakers' sense of urgency. 

More NFP Analysis: Time to sell stocks? Under the hood, three factors may turn markets down

Further fiscal stimulus headlines are set to move the pound in a day dominated by politics rather than data.

GBP/USD Technical Analysis

The Relative Strength Index on the four-hour chart is well below 30 – indicating considerable oversold conditions. That implies a bounce, potentially before the next move down. Pound/dollar is trading below the 50, 100, and 200 Simple Moving Averages and momentum remains to the downside. 

Support awaits at 1.2905, a separator of ranges from July, followed by 1.2840, a stepping stone on the way up around the same time, and 1.2775, a cushion from early in the summer.

Some resistance is at 1.2950, another separator of ranges from two months ago. It is followed by 1.30, a psychologically significant level that provided support in August. Further above, 1.3050 also kept the pair from falling last month.

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