Potential woes for GBP/USD
AS we approach the last quarter of 2020, markets will be monitoring the Brexit process and the US presidential elections that will be held in November 2020. Central banks such as the European Central Bank (ECB) have expanded the size of their purchase programmes in a bid to stimulate an economy reeling from the devastating effects of the novel coronavirus that has left national airline carriers in tatters, and massive lay-offs in various sectors.
This has in turn led to fluctuations in the foreign exchange market, especially in sterling (GBP/USD). These include the long-drawn Brexit negotiation process, and British Prime Minister Boris Johnson imposing additional restrictions (working from home, early closures of bars and pubs) to stave off a second Covid-19 wave. The restrictions could last six months. Furthermore, banks like JP Morgan are preparing to shift around US$235 billion in assets from United Kingdom to Frankfurt. This paints a potentially bearish view that could be in place for GBP/USD.
From the highs near US$1.3500 in the beginning of September 2020, renewed pessimism has seen it trade lower to new lows at US$1.2680 in late September. Looking at the charts from a technical perspective, GBP/USD has been trading in a downtrend. It broke below the important psychological support turned resistance level of US$1.3000 (R1) and attempted to breach the next support level at 1.2775 (S1) but without any success. This level was only traded through on Sept 23 2020.
When applying a Fibonacci retracement from the high of US$1.3500 to the low of US$1.2675, we can see that prices holding below the 38.2 per cent level, which coincidentally, also serves as the support turned resistance psychological level of US$1.3000 (R1). The past weeks of chaotic Brexit development news - particularly when European Commission president Ursula von der Leyen announced legal action against the UK over a breach of the Brexit withdrawal agreement on Oct 1, 2020 - have seen GBP/USD whipsawing between US$1.2820 and US$1.3000.
Looking at the price action thereafter, we can see that GBP/USD retraced higher, possibly from short covering, and attempted to test the then support turned resistance psychological level of US$1.3000 multiple times. Despite breaking above the US$1.3000 psychological resistance level on Oct 9 2020, market uncertainty and speculation on Brexit discussions have ultimately seen it trade below US$1.3000 again.
Based on observations of the price action, coupled with the onset of less than favourable developments from the UK, there is a possibility that GBP/USD could trade lower after this brief retracement above US$1.3000 in the near future, should current conditions persist.
