GBP/USD forecast: Seems all set to slide back towards challenging 1.2400 handle

  • The UK political developments add to the Brexit-related uncertainty and weighed on the GBP.
  • Tempered Fed rate cut expectations underpinned the USD and exert some additional pressure.

The GBP/USD pair failed to capitalize on an intraday uptick beyond the key 1.2500 psychological mark and met with some fresh supply during the early European session on Monday. The latest UK political development, wherein the UK Foreign Office Minister Alan Duncan resigned from his position, turned out to be one of the key factors weighing on the British Pound. This comes on the back of recent reports, suggesting some of the key Tory members - including the UK chancellor Philip Hammond, and ahead of the outcome of the UK Tory leadership contest on Tuesday, which added to the recent pessimism and exerted some downward pressure.

The already weaker sentiment surrounding the Sterling deteriorated further after the UK think tank - NIESR said on Monday that there is a 25% chance that Brexit may have already pushed the economy into a technical recession. NIESR further added about the possibility of a severe economic downturn in the case of a disorderly, no-deal Brexit. Given that hardliner Boris Johnson remains the frontrunner to be the next British PM, the incoming headlines continued fueling speculations that the UK might crash out of the EU on October 31 and keep the GBP bulls on the defensive.

On the other hand, the US Dollar remained supported by the fact that investors continue to scale back their expectations for 50 bps rate cut move by the Fed at the upcoming policy meeting on July 30-31. It is worth recalling that the St. Louis Fed President James Bullard on Friday ruled out the possibilities of a larger rate cut and said that a 25 bps rate cut seems appropriate in the wake of the current US economic condition.

In absence of any major market-moving economic releases, either from the UK or the US, the incoming UK political/Brexit-related headlines might continue to influence the British Pound. This coupled with the USD price dynamics might further collaborate towards producing some short-term trading opportunities on the first day of a new week. 

From a technical perspective, the pair’s inability to capitalize on the recent corrective bounce from 27-month lows and subsequent weakness suggest that the near-term bearish pressure might still be far from being over. Hence, a follow-through weakness, back towards challenging the 1.2400 round figure mark, now looks a distinct possibility. The bearish momentum could further get extended towards testing a support marked by the lower end of a near five-month-old descending trend-channel – currently near the 1.2340 region.

On the flip side, any meaningful recovery back above the 1.2500 handle might now confront some fresh supply near the 1.2545-50 region, which if cleared decisively might trigger a near-term short-covering bounce and lift the pair further beyond the 1.2600 handle towards testing its next major hurdle near the 1.2655-60 area.


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