GBP/USD bears ready to pounce on a hawkish Fed cut, 1.21 handle in focus

GBP/USD crashed overnight on hard Brexit sentiment under the new leadership and Brexiter, Borish Johnson, with the rhetoric from key government ministers over the last day or so hardening. Indeed, markets have factored in a clear message from the PM, that his regime is prepared to take this to the wire.

Speaking on a visit to Scotland, Boris said the old withdrawal agreement that had been draw up by Theresa May and EU leaders, only to then be repeatedly shot down by lawmakers in Westminster, was "dead". This followed the Sunday Times news that Michael Gove said that the UK "must operate on the assumption" that Brussels will refuse to change the Withdrawal Agreement forcing a no-deal Brexit.

"The odds of a hard Brexit continue to climb as Britain’s new Prime Minister Boris Johnson remains on his quest to leave the EU on 31 Oct," analysts at ANZ bank explained:

"Anxieties climbed as UK Foreign Secretary Raab suggested that there was little urgency for UK leaders to hold meetings with EU officials, saying that it would be easier for the UK to negotiate with the EU once it has left the EU. Meanwhile, PM Johnson insists that a deal will be agreed prior to then, but is prepared to leave the EU without an agreement."

Plenty of downside room to go on a hawkish Fed cut

Subsequently, the Pound endured one of its biggest one-day drops since the Brexit referendum. A move of this magnitude would be expected to correct, especially leading into such major events for the week, which include the Federal reserve, US PMI and Nonmanufactouring, the Bank of England and Sino/US trade talks as the main events for cable traders.  On a positive outcome for the Dollar should the Fed signal no more hikes and a strong US economy, GBP/USD can sink much-much further.

GBP/USD levels

Meanwhile, GBP/USD remains on the defensive below a 2-month downtrend at 1.2515 and now the 1.2339 2-month support line as investors now target 1.2108 as being the 78.6% retracement of the whole move up from the 2016 low - 1.1650 marks the Oct 2016 low. On the upside, the Fibo retracement levels are as follows: 1.2490 (23.6%), 1.2658 (38.2%) and 1.2800 (50%), just above the June highs.