GBP/USD: Hopes may have been premature

• GBP/USD has been retreating from the highs reached after Merkel’s comments.
• The Johnson-Merkel meeting will be closely watched by markets.
• Wednesday’s four-hour chart is pointing to potential gains for GBP/USD.

Is Germany ready to compromise with the UK on Brexit? Pound bulls are having second thoughts after they initially sent GBP/USD surging. Nevertheless, sterling is trading above the levels that preceded German Chancellor Angela Merkel’s comments on the Irish backstop.

The soft-spoken said that the EU is ready to look for practical solutions in the most thorny issue related to the UK’s exit from the EU. She added that the backstop is a matter for the Political Declaration (PD) that can be altered while sticking to the bloc’s stance that the Withdrawal Agreement (WA) cannot be changed. The pound further advanced on reports that British officials are having informal conversations with their European peers.

UK prime minister Boris Johnson is set to travel for a meeting with Merkel later today and investors are waiting for clarifications. He will then travel to Paris for an encounter with French President Emmanuel Macron.

There are good reasons to doubt a breakthrough that will avoid hard Brexit.

Norbert Röttgen, a close ally of Merkel, has said that the PM’s visit to Berlin “will not change the German stance.” Moreover,  European Commission President Donald Tusk instantly rejected Johnson’s request to remove the backstop, by labeling it as unrealistic in a tweet:

Those against the backstop and not proposing realistic alternatives in fact support reestablishing a border. Even if they do not admit it.

Reports in the British press say that the PM will now suggest a temporary UK-Ireland bilateral agreement that guarantees no hard border. However, that would break the integrity of the EU’s customs union and single market – and will likely be rejected as well.

With 71 days to go until  Brexit, preparations for a no-deal exit are accelerating. London announced it would pull out British diplomats from non-essential EU meetings from September 1st – in order to focus on the exit.

All in all, Tuesday’s optimism seems unjustified.

Will GBP/USD fall?

The USD awaits a test of its own later today – the release of the Federal Reserve’s meeting minutes. The document may provide more details on the Fed’s thinking around that meeting – when they decided to cut  rates. Markets want to know the bank’s tendency to reduce rates in September.

Back then, Chair  Jerome Powell  said that the cut is only a “mid-cycle adjustment” and not the beginning of a long cycle. However, disappointing economic figures overseas, Trump’s new tariffs, and the inversion of the yield curve have led markets to expect further stimulus.

See  FOMC Minutes Preview: The Fed vs the markets

GBP/USD Technical Analysis

Contrary to the fundamental picture, technicals are pointing higher.

GBP/USD  is trading in an uptrend channel since the middle of last week, reversing a downtrend. Momentum is positive and the recent surge has sent the currency pair above the 50 and 100 Simple Moving Averages – all bullish signs.

Some resistance awaits at 1.2100, which capped cable in recent days. It is followed by the mid-August high of 1.2210, and then by the early August peak of 1.2250. 1.2380 is next.

Support awaits at 1.2080 which held the pair up late last week. It is followed by 1.2040, that provided support last week, and by the 2019 trough of 1.2015. 1.2000 and 1.1985 are next.