GBP/USD breaks below 1.28 to test a critical support structure

• GBP/USD bears have taken control in an impressive break out to the downside.
• Brexit and Covis risks, as well as sentiment for negative interest rates, have weighed on the GBP.

The bears have got off to a racy start in the breakout from the corrective highs on the daily chart. At the time of writing, GBP/USD is trading at 1.2788, a touch from the lows of 1.2775 having travelled from a high of 1.2966.

Cable is down almost 1% at the time of writing with all of the stars aligning from both a fundamental and technical basis. 

The latest positioning data shows that the GBP shorts are still building up and might be expected to continue to do so while no-deal Brexit and COVID-19 second wave risks escalate. 

GBP stood out in the G10 positioning last week. We have seen the erosion of GBP net long positioning with a drop from 7% of open interest to 2%.

The dynamic coincides with speculation that there could be as many as 50,000 new COVID-19 UK cases a day by the end of October if there are not drastic measures implemented immediately to stem the spread of the second wave.

This was a number warned by the government's chief scientific adviser, Sir Patrick Vallance:

At the moment we think the epidemic is doubling roughly every seven days.

If, and that's quite a big if, but if that continues unabated, and this grows, doubling every seven days... if that continued you would end up with something like 50,000 cases in the middle of October per day.

Fifty-thousand cases per day would be expected to lead a month later, so the middle of November say, to 200-plus deaths per day. The challenge, therefore, is to make sure the doubling time does not stay at seven days,

the BBC quoted Vallance saying.

Meanwhile, there are mounting speculations that the UK government is about to back out of the Withdrawal Agreement while trade negotiations with the EU are balking.

GBP positioning has more to go

Shorts are a significant way from being where prior no-deal Brexit fear positioning was recorded.  

The EU has given Britain until the end of the month to amend the newly introduced legislation seeks to unilaterally overturn one of the key provisions of the bilateral agreement reached in January with Brussels.

The legislation seeks to unilaterally overturn a mandatory customs border between Northern Ireland and the rest of the UK if no free trade deal is agreed between London and the EU at the end of this year.

Additionally, talk of negative rates from the BoE is back in the UK headlines which put the balance of risks skewed to the downside for sterling in the short-term.  

GBP/USD levels

The start of the move for which was forecast in the following article has got underway, if not a little too spirited in order to get on board at a healthy discount:

• GBP/USD Price Analysis: Testing strong resistance area, bears waiting to fade

In the above analysis, both the DXY and GBP/USD have moved in the direction expected and cable is now firmly in the hands of the bears wrapped in bearish technical indicator readings.

However, it is still possible that a discount will be awarded to the patient bears if this critical support holds the first tests.

Pulling up the Fibonacci retracement levels of what appears to be the start of the next daily impulse, a 61.8% Fib comes in at the 1.29 area. 

However, a continuation to the downside opens risk towards 1.2690 and 1.2610 according to the Fib extensions -0.271 and -0.618.