The Narrative for GBP/USD is Changing
GBP/USD has enjoyed a strong bid for over a month now as the markets saw the risk of a no-deal Brexit declining. But this may have blinded some to the downside risks presented by a delay in an EU exit. Yesterday’s Bank of England meeting was a reminder of exactly that.
Several politicians have argued that a Brexit delay hurts the economy. It causes uncertainty and leads businesses to delay important investment decisions. It also deters foreign investors for the same reasons.
Proof of this is seen in the UK equity markets. While the FTSE has rallied since hitting a low in October, it is a notable underperformer. Consider that the S&P 500 broke to a record high two weeks ago. The FTSE index has only retraced about half of the decline that started in late July.
In case you’re thinking that the US markets typically outperform, that is mostly true for the last five years or so, but since August it is the German DAX which is outperforming.
For this reason I think it is hard to ignore the message from the BoE yesterday that there are significant downside risks. It remains to be seen if the bank cuts rates to try and accommodate the economy. And if it does, when it will do so.
But I think Sterling can have a lasting impact from the viewpoint shared by policymakers yesterday. Not only that, I expect that the optimism surrounding the unlikeliness of a no-deal Brexit will fade fairly quickly which further removes the driver for more upside in GBP/USD.
GBP/USD is sitting at support and from a technical standpoint there has not been a clear signal, as of yet at least, of a bearish turn.
Support from the pair comes from the upper bound of a previously broken trend channel. Further, support at 1.2800 held the pair higher in late October.
A break below 1.2800 would offer a bearish signal. A more aggressive bear might look to fade a rally back to 1.2846. This is the level the pair bounced higher from yesterday ahead of the BoE meeting.
- GBP/USD sold off yesterday on a dovish BoE and has consolidated in a tight range near lows since.
- A break below 1.2800 could open up the door for a broader decline.
- Resistance for the session ahead is seen at 1.2846.
This article was originally posted on FX Empire
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