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  • Hopes of a softer Brexit prompted some aggressive short-covering move on Thursday.
  • Investors looked past the latest optimism and refrained from placing fresh bullish bets.
  • Stronger USD exerts some pressure ahead of Powell’s scheduled Jackson Hole speech.

The GBP/USD pair extended its steady decline through the early European session on Friday and momentarily slipped below the 1.2200 handle in the last hour, eroding a part of the previous session’s strong upsurge to three-week tops.
German Chancellor Angela Merkel’s optimistic remarks – saying that the Irish border backstop solution could be achieved within 30 days to avoid no-deal Brexit – prompted some aggressive short-covering move around the major and led to a strong intraday rally of over 150-pips on Thursday.

Brexit optimism fades rather quickly

However, the fact that Merkel later denied that she has set a 30-day deadline for UK Prime Minister Boris Johnson to find a solution to remove the Irish backstop from the withdrawal agreement and turned out to be the only factor that kept a lid on any strong follow-through up-move.
Given that Merkel’s comments weren’t exactly a major game-changer to the Brexit equation, the pair failed to capitalize on the overnight up-move, rather met with some fresh supply on the last day of the trading week and was further weighed down by a modest US Dollar uptick.
Against the backdrop of not so dovish FOMC meeting minutes on Wednesday, a goodish pickup in the US Treasury bond yields helped the greenback to regain some positive traction on Friday and further collaborated towards attracting some fresh selling pressure around the major.
It would now be interesting to see if the current pullback marks the end of the recent corrective bounce or is still seen as a buying opportunity as the focus now shifts to Friday’s key event risk – the Fed Chair Jerome Powell’s Jackson Hole speech later at 14:00 GMT.

Technical levels to watch