GBP/USD: Why sterling’s upside correction may have a few more hours to run
A Brexit compromise is always good news for the pound – which has been extending its recovery. Prime Minister Boris Johnson has been seeking to soothe concerns about the controversial Internal Markets bill that passed the first hurdle in parliament.
The legislation violates the Brexit deal that Johnson signed with the EU – as admitted by government ministers. Sterling suffered badly when the move was announced and as Brussels laid down an ultimatum to London – rescind the bill by the end of the month or face sanctions.
Several members of the PM’s ruling Conservative Party have either abstained or voted down the legislation – and others were expected to follow. If the final wording refrains from breaking international law, the pound could extend its gains.
GBP/USD could continue higher if Retail Sales fail to meet high expectations. Despite the expiry of several government programs, economists expect another increase in expenditure in August. The high bar opens the door to disappointment and could send the greenback down.
However, the most important event of the week is due out late in the day – the Federal Reserve’s last decision before the elections. The focus is on the Fed’s new forecasts, especially for employment and growth.
While upgrades are on the cards, the bank may still project only a gradual return to pre-pandemic levels. However, if Federal Reserve Chairman Jerome Powell refrains from signaling new stimulus, stocks may turn down.
The mood in equity markets has already cooled – especially as tech stocks are off their highs. A report that the Federal Trade Commission opened an antitrust probe into Facebook’s dealings is also weighing on the sector. In case the Fed fails to inspire, stocks may drop and the safe-haven dollar may rise.
Overall, optimism about Brexit and weak US retail sales may boost GBP/USD while the Fed may bring it down.
GBP/USD Technical Analysis
Pound/dollar’s recent stability helped turn momentum on the four-hour chart to positive. The Relative Strength Index is stable while cable still trades below the 50, 100, and 200 Simple Moving Averages.
Overall, bears are in the lead, but bulls are lifting their heads.
Support awaits at 1.2875, the daily low. It is followed by 1.2815, a swing low from earlier this week. Strong support is at 1.2765, which is September’s low.
Some resistance is at 1.2925, the weekly high, followed by strong resistance at 1.3045, which capped GBP/USD last week. Further up, 1.3145 and 1.3180 await sterling.