- GBP/USD has been rising amid hopes for US fiscal stimulus, but everything else is playing against the pair.
- Rising British COVID-19 cases may trigger new restrictions, weighing on the pound.
- UK GDP missed estimates, yet no new stimulus is likely.
- Brexit negotiations are unlikely to move until the last moment.
Is cable mounting its last climb? GBP/USD is trading closer to the top of the range, buoyed by hopes for US fiscal stimulus. President Donald Trump backtracked on canceling talks with Democrats after markets fell earlier in the week, and is now pushing them higher with the willingness to compromise. In turn, the safe-haven dollar is down. However, the pound has its own issues.
1) Stimulus asymmetry: While America’s potential relief package is still unknown, Britain’s less-generous furlough scheme is already priced into sterling. That is the first bearish factor.
Chancellor of the Exchequer Rishi Sunak is set to lay out a reduced program to aid employees who are unable to work due to the pandemic. The move was already made known a few weeks ago, and Sunak’s official announcement is unlikely to help the pound. Moreover, paying only two-thirds of salaries is set to hurt consumption.
2) Rising coronavirus cases: The lower temperatures are forcing people to spend more time inside, and eroding support in the government may prompt people to flout social distancing rules. There may be other reasons for the increase in coronavirus cases, but the result is clear – rising pressure on the National Health Service.
The government is contemplating imposing new restrictions in the northwest, where the disease is spreading at a rapid clip. That implies reduced economic activity going forward.
3) The economy was not doing that great: Gross Domestic Product figures for August – when the mercury was higher – badly disappointed. Output grew by only 2.1%, contrary to expectations for more than double that amount. Moreover, July’s GDP statistic was revised down to 6.4%.
While these figures look robust in absolute terms, they come after a devastating drop in the spring. The chances that the Bank of England sets negative interest rates is growing.
4) Brexit: The saga continues with ups and downs – and Friday will likely be a down day. Chief EU Negotiator Michel Barnier tends to release updates on the talks at the end of the working week and he almost always downbeat. In any case, no breakthrough is likely before the EU Summit next week. London and Brussels remain at odds over state aid and fisheries.
Overall, optimism about the US stimulus is unlikely to keep cable afloat.
GBP/USD Technical Analysis
Pound/dollar is trading above the 50 and 100 Simple Moving Averages but suffers from downside momentum. The recent range trading has balanced the technical picture.
Support awaits at 1.2885, which was a low point on Thursday, and it is followed by 1.2850 and 1.28.
Resistance is at 1.2975, Thursday’s high, followed by the all-important 1.30 level. The next line to watch is 1.3050.Get the 5 most predictable currency pairs