GBP/USD Outlook: Upside seems limited amid persistent Brexit uncertainties

• GBP/USD lacked any firm directional bias on Tuesday amid a combination of diverging forces.
• Brexit-related uncertainties, renewed lockdown measures in the UK undermined the sterling.
• Hopes of additional US stimulus weighed on the safe-haven USD and extended some support.

The GBP/USD pair had good two-way price moves on Tuesday and was influenced by a combination of diverging forces. Hopes that US lawmakers will reach an agreement on additional fiscal stimulus remained supportive of the upbeat market mood. This, in turn, undermined the US dollar's relative safe-haven status and assisted the pair to gain some traction. The uptick, however, lacked any strong follow-through, instead quickly ran out of the steam amid persistent Brexit-related uncertainties.

The European Commission has officially stated its willingness to intensify trade talks with the UK. Separately, the UK PM's spokesperson reiterated that the resumption of talks could only happen if the EU fundamentally changes its approach and make clear that they have done so. It is worth recalling that trade talks between the UK and the EU had stalled amid disagreements over fishing access and competition issues. This comes at a time when Britain imposed fresh lockdown measures to curb the second wave of the coronavirus infection, which took its toll on the British pound.

The pair retreated around 70 pips from daily swing highs, albeit managed to find some support ahead of the 1.2900 mark amid optimism about a pre-election US stimulus package. Market expectations were further fueled by the US President Donald Trump's comments, saying that he was willing to accept a larger aid bill despite opposition from his own Republican Party. That sparked a selloff on the US bonds and pushed the yield on the benchmark 10-year bond jumped four-month highs, which exerted heavy pressure on the buck and assisted the pair to gain some positive traction during the Asian session on Wednesday.

The pair rallied back closer to the key 1.3000 psychological mark and seemed rather unaffected by mixed UK consumer inflation figures. The headline UK CPI increased 0.4% MoM in September as compared to 0.5% expected, while the yearly rate matched consensus estimates and came in at 0.5%. Meanwhile, the core CPI (excluding volatile food and energy items) arrived at +1.3% YoY versus +0.9% rise recorded in August, meeting consensus forecast. With Wednesday's key UK macro data out of the way, the incoming Brexit-related headlines will continue to play a key role in driving the sentiment surrounding the British pound. On the other hand, developments surrounding the US stimulus measures and coronavirus saga will influence the USD price dynamics and further contribute to produce some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the pair has been showing some resilience and attracting some dip-buying at lower levels. However, the attempted positive move lacked any strong follow-through, suggesting indecision over the pair’s near-term trajectory and warranting some caution before placing aggressive directional bets. Hence, any subsequent strength is more likely to confront a stiff resistance near a short-term descending trend-line, currently near the 1.3015-20 region. That said, a convincing breakthrough might be seen as a fresh trigger for bullish traders and lift the pair back towards monthly swing highs, around the 1.3080-85 supply zone.

On the flip side, the 1.2900 round-figure mark might continue to protect the immediate downside. This is followed by important horizontal support near the 1.2865-60 region. Failure to defend the mentioned support levels will negate prospects for any further positive move and turn the pair vulnerable to accelerate the fall back towards the 1.2800 mark. Some follow-through selling will set the stage for a slide back towards challenging the very important 200-day SMA, currently near the 1.2710-1.2700 region.