GBP/USD hangs on a thread in the balance of the Fed and Brexit

• GBP/USD bulls holding the 1.21 handle ahead of Federal Reserve themes for the week ahead.
• Tory rebels seeking support in a potential vote of no confidence against PM Johnson.

Leveraged funds have been net buyers of GBP and USD of late but cable has stabilised at the weekly lows of 1.2022 and the pound has been a performer across the board despite Brexit risks. Profit-taking will have been a factor which followed positive data surprises from the UK economy.  in fact, Sterling ended last week as the best performing G10 currency on a 5-day view.

"Better than expected UK retail sales data helped to lighten the mood during the course of the week but most of GBP’s gains followed the headlines that Labour Leader Corbyn has stepped up his efforts to avoid a no-deal Brexit," analysts at Rabobank explained.

 "Corbyn has written to other political party leaders and Tory rebels seeking support in a potential vote of no confidence against PM Johnson. The pace of the political news flow can be expected to step up once parliament returns from the summer recess on September 3 and this is likely to determine whether the pound continues to recover ground or whether it slams through key technical support levels in the next couple of months."

Bull clinging to some form of a Brexit extension or a miracle

However, we now enter a phase where central banks are coming back to the fore, a driver that had taken a back-seat to geopolitical headlines in recent sessions making for a volatile spell throughout global markets. If traders could only get a handle on the direction of central banks, then the divergences would likely support the Dollar over the Pound at this juncture. The Federal Reserve will be under the spotlight again this week, with not only the minutes but the Jackson Hole scheduled.

Markets will be looking for some direction as to Powell's thinking for his non-committal press conference along with mixed Fed speak which both indicate a divided FOMC, it's anyone's guess as to what the next move from the Fed will be. Should the Fed hold off from cutting rates again so soon as September, it will be sayōnara to the bulls clinging to the prospects of a dovish bias from the Fed and a soft Brexit outcome by October 31st, either in the form of an extension of a miracle deal prior to the withdrawal date.

GBP/USD levels