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GBP/USD: How Low Can The Pound Go?

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GBP/USD: How Low Can The Pound Go?
  • GBP/USD has been extending its massive sell-off, falling to 29-month lows.
  • Boris Johnson's refusal to meet his European peers is weighing heavily.
  • Tuesday's daily chart is pointing to oversold conditions, implying a bounce.

When it rains, it pours – GBP/USD has lost over 250 pips in less than two days of trading – a rare feat in currency markets. UK PM Boris Johnson is behind the move with his drive toward a hard Brexit. The new PM – less than a week in the job – is refusing to meet his European counterparts unless they agree to reopen the Brexit Withdrawal Agreement.

The Europeans are unimpressed. Fresh reports suggest EU leaders are "ready to call Boris Johnson's bluff" and hold a no-deal summit on October 17th – two weeks before the October 31st deadline.
If nothing changes by Halloween, the UK will crash out of the bloc without an accord, potentially causing massive economic disruption. While some analysts have suggested that all of the colorful PM's actions are part of an upcoming election campaign, investors have hit the panic button.

Johnson's approach to talks follows on his previous actions. On his first in the office, he nominated hardline Brexiteers to senior positions in his cabinet and set up three committees to prepare for a hard Brexit. One of these committees is led by Michael Gove, who said that the prospects of leaving without an accord are "very real." While Johnson rejected Gove's claims on Monday, his unwillingness to speak to leaders across the channel weighs heavily. 

Scotland's First Minister Nicola Sturgeon has said that the "Dangerous UK government" is intent on forcing a no-deal Brexit after meeting the Johnson – echoing market worries. He will travel to Wales today and his public statements will be followed closely. Will he offer a more nuanced or balanced approach? Markets will be scrutinizing every word.

Elsewhere, global traders are awaiting the all-important Federal Reserve decision on Wednesday. The baseline scenario is for the Fed to cut interest rates for the first time since the crisis but signal that no further moves are due soon. Nevertheless, uncertainty remains high.

The bank's preferred measure of inflation – Core Personal Consumption Expenditure (Core PCE) – is due out today and set to tick up from 1.6% to 1.7% in June. The outcome will likely have a minimal effect on the decision. Later on, the Conference Board's Consumer Confidence measure is set to show an upbeat mood among consumers. 

All in all, Brexit and Boris Johnson are in the limelight, with some room for Fed speculation to have its say.

GBP/USD Technical Analysis – Heavily oversold

GBP USD technical daily chart July 30 2019

To get a perspective about the magnitude of the pound's decline, we are zooming out to the daily chart. The Relative Strength Index has dipped below 30 – indicating oversold conditions. Such conditions are already at extreme levels on the four-hour chart.

The RSI implies a bounce, but it is unclear when it may come and far it may go. Downside momentum remains fierce and GBP/USD continues trading below the key 50, 100, and 200-day Simple Moving Averages.

The fresh low of 1.2118 is the initial line of support. It is followed by 1.1985 and 1.1866 which were swing lows in early 2017 and late 2016. 

Some resistance awaits at 1.2225 which is the daily high. It is followed by 1.2305 which served as resistance in early 2017 and then by 1.2380 (Friday's low) and 1.2440 (a previous double bottom).

Image sourced from Pixabay

Posted-In: Boris Johnson BrexitNews Eurozone Forex Global Markets General

 

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