GBP/USD Forecast: Ready to retreat? Johnson's optimism and Trump's tirades may have gone too far

"Yes we can" – Barrack Obama's rallying cry has been echoed British and German leaders concerning finding a solution on the thorny Irish backstop. But "can" does not mean "will" – and fears of a no-deal Brexit remain intact. The upcoming week features an attempt to stop a hard Brexit, trade developments, and critical data points from the US to move GBP/USD.

This week in GBP/USD: Boris Johnson's Brexit tour

German Chancellor Angela Merkel has said that a solution can be found to the Irish backstop, perhaps within 30 days. UK prime minister Boris Johnson instantly responded that it is up to the UK to find an alternative arrangement and jumped on the headline and the challenge following a friendly visit to Berlin.

French President Emmanuel Macron was already less open by saying the backstop is "indispensable," but was ready to hear the UK's ideas. The pound jumped in response, and Johnson's tour was hailed as a success – GBP/USD hit the highest in three weeks.

Yet perhaps low expectations and profit-taking had their role in the outcome – yet the reality is harsher. Merkel and Macron may have been playing the blame game. They may be showing kindness and openness to listen to British proposals – only to dismiss them later as unrealistic and blame the UK. The PM is no different – he insists that the UK will not return to a physical border in Ireland and may be ready to blame the EU for doing so.

The Irish backstop keeps the UK in the EU's customs union – which Brexiteers see as a trap that would not consist of a "real Brexit" – Britain signing its own trade agreements. Holding the UK is necessary to prevent the erection of customs controls on the emerald isle – a move that would break the spirit of the Good Friday peace agreement.  

Keeping an open border while the UK would set its rules would break the integrity of the EU's customs union. Yet even if the EU were to agree – it is unclear if Johnson would have a majority in parliament to pass a deal. Some members of his Conservative Party reject other parts of the accord his predecessor reached with the EU.

GBP/USD eventually backed down from the highs but retained a significant chunk of the gains.

More GBP/USD Forecast: Selling opportunity? EU openness seems part of the blame game

In trade wars, while the US reduced the number of Chinese goods, it will hit with tariffs, around $110 billion worth of products are set for a 10% levy on September 1st. And while America also delayed the ban on Huawei – the Chinese telecom giant – China has said it will retaliate with tariffs on $75 billion worth of American imports.

Trump then hit back by announcing promising action against China, including searching Chinese imports and perhaps announcing more tariffs. The US dollar dropped alongside yield.

The FOMC Meeting Minutes have shown that members were split between the mainstream view of reducing rates by 25 basis points in July as a limited "insurance cut," while others wanted no cut, and a couple opted for a 50bp slash. The world's most powerful central bank was divided back then. 

Federal Reserve Chair Jerome Powell said he will "act as appropriate" and dropped the reference to a "mid-cycle adjustment" – hinting of a rate cut and also pushing the dollar lower.

See Powell powerless against Trump's trade wars – US braces for a recession, USD set to move

UK events: All about Brexit

Brits enjoy a long week due to a bank holiday on Monday. Nevertheless, speculation about possible alternative arrangements and the odds of reaching a deal will move the pound.

On Tuesday, Labour leader Jeremy Corbyn holds a meeting of MPs opposing a hard Brexit to coordinate. Corbyn would like the parties and also pro-Remain rebels from the Conservative Party to rally around him – making him PM instead of Johnson. However, many are reluctant to support the hard-left leader and place him in 10 Downing Street – even for a short time. Former Tory MP Nick Boles said he would not attend the meeting. 

Other options include forcing the government to ask for an extension to Article 50 – the exit clause from the EU – or forcing a snap election. Corbyn, Johnson, and others seem to be preparing for a fresh poll. The PM has a minimal majority in the House of Commons and has surrounded himself with campaigners. Corbyn's speeches have veered off Brexit to his preferred social topics, and also the Liberal Democrats are in campaign mode under the new leader Jo Swinson. 

Bank of England Governor Mark Carney speaks in Jackson Hole after markets close, and is unlikely to move markets. The only noteworthy event on the calendar is GfK's Consumer Confidence gauge for August.

Here are the upcoming UK macro events, as they appear on the economic calendar:

US events: Trade tensions, GDP, and more

The last week before the new duties may see efforts to postpone them. If this happens, markets will cheer – but the chances are slim. Any reports about talks may improve the sentiment, but without removing new tariffs, markets may suffer.

Late Friday's tweets Trump seem to close the door on a compromise. 

The US economic calendar features several top-tier events. Monday's Durable Goods Orders report will provide data on investment in July. Are businesses investing again? That has been a weak point in the economy. Modest gains are on the cards. 

The Conference Board's Consumer Confidence indicator for August may drop after other surveys have shown falls. Weaker confidence implies fewer dollars spent. The most significant release is due out on Thursday, with a revision to second-quarter GDP. A minimal downgrade from 2.1% to 2.0% annualized is forecast. In quarterly terms, that would still represent a 0.5% expansion. The UK economy squeezed by 0.2% at the same time. 

Friday's Core Personal Expenditure (Core PCE) is expected to remain unchanged at 1.6% – below the Fed's 2% target. The bank considers PCE to be more accurate than the Consumer Price Index (CPI).

End-of-month flows may trigger some volatility on Friday.

Here is the list of US events from the FXStreet calendar:

GBP/USD Technical Analysis 

GBP/USD has attempted to break above the downtrend resistance line that capped it since mid-June, but the move is yet to be confirmed. Momentum remains to the downside, and the currency pair continues trading below the 50, 100, and 200-day Simple Moving Averages. Overall, the picture is mostly bearish.

Support awaits at 1.2210, which capped cable in mid-August. It is followed by 1.2120, which was the initial post-crash low. Further down, 1.2180 was a trough in early August, followed by 1.2015 – the critical 2019 low. 1.1985 and 1.1866 are next.

Resistance is at 1.2275, which was a swing high from mid-August. Next, we find 1.2380 that provided support in mid-July. Next, we find 1.2420 and 1.2510 – which both cushioned GBP/USD earlier.

GBP/USD Sentiment

It is hard to see any magic formula coming out of the EU-UK backstop talks. And while trade tensions are weighing on the dollar, Brexit has proven to be more potent than Trump – so GBP/USD has room to fall.

The FXStreet Poll is showing that experts are bearish in the short and medium terms and mixed about the long-term. The targets are little changed in comparison to the previous week and a broad range of outlooks for the long term reflects high uncertainty.  

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