GBP/USD Forecast: Rising only due to dollar weakness may reach its limit, selling opportunity?

GBP/USD has dropped as the dollar sheds ground alongside falling yields.
The UK's issues with coronavirus and international relations may weigh on sterling.
Wednesday's four-hour chart is painting a mixed picture.

Yohay Elam FXStreet

Benefiting from the suffering of others – Schadenfreude has been a constant feature of pound/dollar trading. However, it may eventually reach its end.

The US dollar is falling across the board – and alongside US yields – as investors fret over several US-related issues. Markets continue unwinding the extreme safe-haven positions that they took in the greenback during the most worrisome days of the coronavirus crisis.

Hopes for a COVID-19 vaccine are on the rise, with Novavax being the latest pharma firm to present promising results. Another positive development is that talks between Republicans and Democrats are making progress – potentially unleashing more stimulus than previously expected. The opposition party is insisting that the $600/week top-up to the unemployed continues.

However, market optimism may come to a test shortly, with two significant data releases that provide hints toward Friday's Non-Farm Payrolls report. First, ADP's private-sector labor market figures are projected to show a smaller increase in positions – only around one million – a slower recovery.

See US ADP Employment Change July Preview: Following the high-frequency data

The second figure is a forward-looking one – the ISM Non-Manufacturing Purchasing Managers' Index. Investors will likely shrug off an upbeat headline figure and focus on the employment component. Is America still hiring? The parallel figure for the smaller manufacturing sector fell short of estimates.

See US Non-Manufacturing PMI July Preview: Second thoughts on the US economy

In the UK, the recent increase in coronavirus cases is worrying – and the government is coming under increased scrutiny. Ministers are on the defensive, leaning on scientific advice in their decision-making processes, while the unsettling situation potentially resulting in another lockdown of London – could limit new action.

Moreover, there is no news on the international front, like Brexit, US-UK trade talks, and relations with China have yet to improve.

The next significant event is the Bank of England's rate decision due early on Thursday. While the "Old Lady" is set to leave rates unchanged, hints about QE – pound-positive – and negative rates will be closely watching. The BOE also publishes its Monetary Policy Report, which includes updated forecasts. Does the bank see the glass half full or half-empty?

See Bank of England Preview: Three things that will move the pound on “Super Thursday”

Overall, when dollar weakness hits its limits, the pound could be found out – a potential selling opportunity.

GBP/USD Technical Analysis

Cable's latest upswing is not driven by momentum – which remains negative on the four-hour chart. On the other hand, GBP/USD is trading above the 50, 100, and 200 Simple Moving Averages, a tailwind for the currency pair.

Resistance is at the daily high of 1.3130, followed by July's peak of 1.3170. Further resistance awaits at 1.32 and 1.3270.

Support awaits at 1.3050, the daily low, followed by 1.2985, Tuesday's trough. Further down, 1.29 and 1.2845 await pound/dollar.

More Where next for the dollar, stocks and the US economy after downbeat data and the Fed

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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