GBP/USD: Three reasons for a downside correction after the Brexit breakout

October 22, 2020 Off By admin-445
  • GBP/USD has surged on the news that Brexit talks will resume, yet an accord is far from being guaranteed. 
  • Election uncertainty in the US may further support the greenback.
  • Rising coronavirus cases on both sides of the pond may also weigh on cable.
  • Thursday’s four-hour chart continues pointing to overbought conditions. 
  • Brexit talks are back – with extra intensity, boosting the pound. Can it hold?
    Prime Minister Boris Johnson agreed to resume negotiations five days after cutting them off and telling the nation to prepare for a no-trade-deal exit in January. The PM made his move after Chief EU Negotiator Michel Barnier committed to rapid negotiations. The French statesman is leading a large delegation to London.
    Here are three reasons why GBP/USD may be headed lower:
    1) Nothing has been resolved
    Agreeing to intensify talks does not mean reaching common ground on the thorny issues. London and Brussels are at odds over state aid – the rules allowing and forbidding countries to help their industries compete. This significant topic is competing with a minor, yet politically charged one – fisheries.
    Moreover, Britain and the bloc are still at loggerheads over the previous accord. Johnson’s Internal Markets Bill knowingly violates the Withdrawal Agreement and the EU took legal action against it.
    Overall, the enthusiasm from new talks may fade swiftly. 
    2) US elections uncertainty
    security officials announced that Russia and Iran obtained voter registration files and are threatening voters. While the elections infrastructure seems unharmed, the specter of foreign intervention is weighing on sentiment.
    Moreover, President Donald Trump has narrowed the gap against rival Joe Biden in recent state and national polls, raising the chances for a contested election. Both septuagenarians will clash in the last presidential debate late on Thursday and may influence undecided voters. However, it is essential to note that around 44 million Americans have already cast their votes.

    There are only 12 days left until Election Day, and while Democrats and Republicans are reporting progress in stimulus talks, time is running out to pass a deal in both houses of Congress. Optimism about a relief package – which weighed on the safe-haven dollar – may fade away.

  • 3) Coronavirus
    Additional English regions are entering Tier Two or Tier Three limitations as infections soar and break records. Wales already announced a strict lockdown. That dims economic prospects and could send sterling lower.
    The situation is only marginally better in the US, where cases have not hit new highs, but hospitalizations are on the rise – including in warmer southern states.

    All in all, there is room to consider a correction.
    GBP/USD Technical Analysis

    Pound/dollar is benefiting from upside momentum and trades above the 50, 100, and 200 Simple Moving Averages, but the Relative Strength Index is just above 70 – implying a drop, at least a temporary one.
    Support awaits at the daily low of 1.3120, followed by 1.3085, the previous October peak. The next lines to watch are 1.3065 and 1.3025.
    Resistance is at Wednesday’s peak of 1.3175, followed by 1.3245 and 1.3310.