Break below 200-DMA/61.8% Fibo. to pave the way for further weakness

  • GBP/USD Consolidated the recent slump and remained confined in a range on Friday.
  • Sustained USD selling bias extended some support and helped limit the downside.
  • The focus shifts to a debate on the UK’s Internal Market Bill in the House of Commons.

The GBP/USD pair seesawed between tepid gains/minor losses on Friday and consolidated its recent slump to seven-week lows. The US dollar remained depressed on the back of the deadlocked over the new US fiscal stimulus measures. The US Senate on Thursday rejected a Republican bill that would have provided around $300 billion in new coronavirus aid. Democrats voted to block the legislation on the grounds that the package was too small to tackle the scale of the economic downturn led the coronavirus pandemic. This, in turn, was seen as a key factor lending some support to the major.

However, growing fears of a hard Brexit continued undermining the British pound and kept a lid on any meaningful positive move for the major. Given that investors remain preoccupied with the developments surrounding the Brexit saga, Friday better-than-expected UK manufacturing data failed to impress the GBP bulls or provide any meaningful impetus to the major. In fact, the UK Industrial Production increased by 5.2% MoM in July and Manufacturing Production rose 6.3% MoM. Separately, the monthly UK GDP report showed that the economy recorded a growth of 6.6% in July. The figures reaffirmed a continued rebound in the economy amid the further reopening of the lockdown measures.

Nevertheless, the pair suffered its worst weekly decline since March and recorded its lowest weekly close since mid-July. However, bulls, so far, have managed to defend the very important 200-day SMA amid sustained selling around the USD. News that AstraZeneca resumed its phase-3 trial revived hopes for a coronavirus vaccine and provided a strong lift to the global risk sentiment, which further dented the greenback’s relative safe-haven status. This, in turn, prompted some short-covering move during the Asian session on Monday as the focus now shifts to a debate on the UK’s Internal Market Bill in the House of Commons.

It is worth recalling that Britain unveiled draft legislation last week, which acknowledged that some powers conferred by the legislation might be inconsistent with international law. The European Union took a firm stance and threatened to pursue legal action against the UK over breach of the Brexit Withdrawal Agreement (BWA) if it doesn’t drop the bill. In addition, the EU signalled that breaking the BWA will lead to a no-deal Brexit. Hence, the incoming headlines will play a key role in influencing the sentiment surrounding the sterling and infuse a fresh bout of volatility amid absent relevant market-moving economic releases, either from the UK or the US.

Short-term technical outlook

From a technical perspective, the pair has managed to find some support ahead of important confluence support – comprising of 200-day SMA and the 61.8% Fibonacci level of the 1.2252-1.3482 strong positive move. Bearish traders might wait for a sustained break through the mentioned support, around the 1.2735-30 region, before positioning for any further slide. The pair might then weaken further below the 1.2700 mark and accelerate the fall further towards the 1.2640-20 strong horizontal support.

On the flip side, any meaningful recovery might now confront immediate resistance near the 1.2865-70 region (50% Fibo. level). This is followed by the 1.2900 mark, which might cap the upside. That said, some follow-through buying might a fresh wave of the short-covering move and push the pair back towards the key 1.3000 psychological mark – nearing the 38.2% Fibo. level.

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