GBP/USD Forecast: Sunak exacerbates sterling's slide, US data could trigger larger breakdown

GBP/USD has been extending its falls amid fears of UK taxes, ongoing dollar strength.
A critical Non-Farm Payrolls hint and BOE Bailey's speech are set to rock cable.
Thursday's four-hour chart is showing that the pair is nearing critical support.

Yohay Elam FXStreet

"Difficult things to come" – read a note snapped by a quick photographer, contributing to the pound's fall That note belongs to Rishi Sunak, Chancellor of the Exchequer, who was about to address fellow Conservative Party members. According to the paper, he also promised them "no horror show of tax rises."

Sunak is trying to plug a hole in the government's coffers as it struggles amid the coronavirus crisis. Raising taxes may be for a good cause – prolonging the successful furlough scheme which has been keeping workers attached to their jobs. The program is set to expire next month and the next steps remain unclear.

Fears of mass unemployment joined the ongoing deadlock in Brexit talks. Chief EU Negotiator Michel Barnier stated that there has been no progress and accused his British counterparts of asking for the benefits of staying in the bloc without the obligations.

Sterling was also hit by the central bank. Officials seemed to echo Sunak's concerns and issued warnings of a long recovery to pre-pandemic levels. Andrew Bailey, Governor of the Bank of England, reiterated his position that negative rates are in the BOE´s toolbox, but are unlikely to be implemented soon.

GBP/USD – which was already falling on a bounce in the dollar – remains on the back foot, and trades nearly 200 pips off the 1.3480 peak.

The next moves depend on US data. The ISM Services Purchasing Managers' Index for August is set to fall from the high of 58 points recorded in July, while the employment component is projected to contract at a faster clip. Are expectations too low?

See ISM Services PMI Preview: Low bar opens door to (temporary) dollar bounce

On Wednesday, ADP's private-sector jobs report disappointed with an increase of only 428,000 positions. Investors shrugged off the figure as the payrolls firm has been off the mark in recent months, failing to catch up with the rapid moves in the labor market inflicted by the virus.

Investors remain optimistic about a coronavirus vaccine, even though it may be rushed by President Donald Trump's administration ahead of the elections. Washington's sanctions against Chinese diplomats were shrugged off by investors. Any significant development on both fronts could move markets.

Overall, the pound is suffering and now the ball moves to the US court, with data at the forefront.

GBP/USD Technical Analysis

Pound/dollar is approaching a critical support line – 1.3265. It was a peak in mid-August and later served as a separator of ranges. Moreover, the 50 Simple Moving Average awaits GBP/USD at that point.

Momentum has turned to the downside, raising the chances of a downward break.

Below 1.3265, the next noteworthy cushion is at 1.3160, which provided support at last week, followed by 1.3120 and 1.3050.

Some resistance awaits at 1.33, a stepping stone on the way up last week, followed by 1.3360, the daily high. The next lines are 1.3420 and 1.3480.

More Facing the elephant in the room – The US elections are getting close

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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