GBP/USD Forecast: Three Factors Point Lower But Brexit Remains the Wildcard

FXStreet  |

  • GBP/USD is trading in the mid-1.3050, hit by the Fed.
  • The focus shifts to the BOE, with one eye on cross-party Brexit talks.
  • The four-hour chart shows overbought conditions.

Will the cross-party talks yield an accord on Brexit? This is the key question for pound traders. The Times of London suggests that UK PM Theresa May is inching closer to substantial compromises with the Labour Party on the thorny topic of a Customs Union. If Britain's main parties agree on a way forward for a smoother Brexit, Sterling has room to rally.

In other political news, the PM sacked her defense minister Gavin Williamson over alleged leaks of secret discussions. May previously seemed to have lost control over her party, and she reasserted her authority with Williamson's firing.

As we wait for cross-party developments, GBP/USD is in the hands of central banks and technical levels. The three factors for eyeing the downside are:

1) Not-so-dovish Fed decision

The US Federal Reserve and its Chair Jerome Powell are not getting closer to cutting interest rates. While the Washington-based institution acknowledges falling inflation, it sees it as temporary and is pleased with the growth, employment and improvement abroad.

Powell's confident message and the reiteration of the patient stance on interest rates sent the US Dollar higher.

2) BOE not nearing a rate hike

The Bank of England would like to raise interest rates, as wage rises may translate into higher inflation and as credit remains too cheap. However, the uncertainty about Brexit, despite the delay, paralyzes the BOE.

Governor Mark Carney and his colleagues will present the Quarterly Inflation Report alongside the rate decision and will shed some light on the thinking at the "Old Lady." There is a good chance that the BOE will align itself with other central banks and turn dovish, weighing on Sterling.

3) Overbought conditions point to the downside

GBP USD technical analysis May 2 2019

The Relative Strength Index on the four-hour chart has only dropped below 70 points before rising up again, indicating overbought conditions.

Other indicators are mixed. Cable is comfortably above the 50 and 200 Simple Moving Averages but was unable to capture the 100 SMA.

Support awaits at 1.3020 that capped an upwards move in late April. 1.2960 was the low point in March and separates ranges. 1.2920 held the pair down late last week, and 1.2870 is the lowest point in the past two months.

The round number of 1.3100 was the top point on Thursday and serves as initial resistance. It is followed by 1.3140 that held it down in mid-April and by 1.3200 that was a high point in early April.

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