Has pound absorbed its full share of bad news?

Since the beginning of this week, the pound has rallied a bit against the dollar. But the market is going through a lot of noise, coming out of the United Kingdom itself. The concerns over Brexit situation continues to worsen.

The UK government is progressing its controversial plan to rewrite the Brexit withdrawal agreement, and is showing no signs of backing down. The chances of a no-deal Brexit are rising notably with worries whether the Internal Markets Bill will make its way through the Commons and Lords successfully. Even if that happens, the European Union is highly unlikely to sign a free-trade agreement with the UK given the lack of trust, and threat of withdrawal agreement breach.

However, the focus this week will be on Bank of England's monetary policy outcome due tomorrow. In our view, the central bank will maintain interest rate at 0.1%. Uncertainty regarding both Brexit negotiations and the increasing number of coronavirus cases are likely to sway the MPC to extreme dovishness. Few members have even discussed negative rates, however we don't expect it for tomorrow's meeting.

Overall, the spirit is low when it comes to trading in pound. The fact that EU may sue the UK over the legality of certain moves in the negotiations is keeping the pound under a microscope. However, technical analysis suggest that buyers are starting to step in. The GBPUSD after hitting a one and half month low of 1.2761 made a reversal towards 1.2896. The chart also witnesses a Hidden Bullish Divergence with prices giving higher lows while RSI indicator giving lower lows, further supporting the upside in the pair. However, immediate strong resistance lies at 1.2930 which is a trend line as well as 50 days moving average level and strength above this will only lead prices towards 1.3040 and then at 1.3160-1.3210 which is a key 61.8% Fibonacci Retracement level. But, we can't rule out the fact that cautiousness still grapples the investors mind ahead of BOE monetary policy and any negative news regarding the economy or Brexit will negate the bullish view. On downside, the pair's recent low of 1.2760 will act as a crucial support, below which next support lies at 1.2715-1.2640-1.2510.