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GBP/USD To Extend Slide on No-Deal Brexit Fears, Covid-19 Second Wave

GBP/USD To Extend Slide on No-Deal Brexit Fears, Covid-19 Second Wave

Daniel Moss, Analyst

British Pound, GBP/USD, Brexit, UK-EU Trade Relations, Bank of England – Talking Points:

  • The US Dollar extended its slide lower during Asia-Pacific trade.
  • The Bank of England’s continued discussions on the effectiveness of negative rates may weigh on the British Pound.
  • GBP/USD poised to break lower as price carves out a Bear Flag just above key support.

Asia-Pacific Recap

The haven-associated US Dollar resumed it slide lower against its major counterparts during Asia-Pacific trade, as the risk-sensitive Australian Dollar climbed back above the 0.73 level.

Asian equities broadly declined, led by Hong Kong’s Hang Seng Index, which plunged over 1.5% after HSBC was placed on China’s ‘unreliable list’.

Gold and silver dipped lower alongside crude oil, while platinum and palladium crept higher.

Looking ahead, speeches from ECB President Christine Lagarde and multiple Federal Reserve members headline a rather light economic docket.

GBP/USD To Extend Slide on No-Deal Brexit Fears, Covid-19 Second Wave

Market reaction chart created using TradingView

BoE Negative Rate Talk Capping British Pound

The Bank of England’s continued discussions on “the effectiveness of negative policy rates” could weigh on the performance of the politically-sensitive British Pound in the coming months, with the Monetary Policy Committee (MPC) being “briefed on the Bank of England’s plan to explore how a negative Bank Rate could be implemented effectively” at its September meeting.

In fact, the central bank took it a step further at its recent monetary policy meeting, stating that “the Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations [of negative rates] in 2020 Q4”.

This suggests that British policymakers are actively considering taking the Bank Rate into negative territory “should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates”

That being said, with all MPC members judging that “the existing stance of monetary policy remained appropriate at this meeting” it appears additional stimulus measures may be off the table until early next year.

Nevertheless, deteriorating Brexit negotiations and a worrying surge in Covid-19 cases may force the hand of the central bank and in turn drag on the local currency against its major counterparts.

GBP/USD To Extend Slide on No-Deal Brexit Fears, Covid-19 Second Wave

Source – Bank of England

Deteriorating Brexit Negotiations Impeding GBP/USD

Although European Commission President Ursula von der Leyen is “convinced” that a deal with the United Kingdom is possible, it seems unlikely that with “significant gaps remaining in key areas, including fisheries and subsidies” that an all-encompassing trade deal can be successfully ratified in time to avoid a dreaded “no-deal” Brexit.

Moreover, UK Prime Minister Boris Johnson’s decision to introduce legislation allowing the nullification of parts of the Brexit agreement with the European Union could put further strain on the pivotal relationship between the two regions. Johnson moved forward with the bill despite the Government openly admitting that it would violate international law.

Furthermore, the Prime Minister’s decision has been met with global condemnation and prompted US Democratic presidential nominee Joe Biden to state that “we can’t allow the Good Friday Agreement that brought peace to Northern Ireland to become a casualty of Brexit [and] any trade deal between the US and UK must be contingent upon respect for the Agreement and preventing the return of a hard border”.

Of course, Mr Biden is still running in a hotly contested debate with incumbent President Donald Trump and although he currently leads the polls against his Republican counterpart, it is hardly a certainty that he will be successful come November 3.

Nonetheless, the Democratic nominee’s statements may begin to hold more weigh over the next 6 weeks and could begin to have a material impact on the GBP/USD exchange rate if Biden continues to increase his lead in the polls.

To that end, GBP/USD seems poised to extend its slide from the monthly high amid deteriorating Brexit negotiations, rising cases of Covid-19 and a BoE ready to introduce a negative interest rate policy if the situation calls for it.

GBP/USD Daily Chart – Bear Flag Pattern in Play

GBP/USD To Extend Slide on No-Deal Brexit Fears, Covid-19 Second Wave

GBP/USD daily chart created using TradingView

As noted in previous reports, the GBP/USD exchange rate appears to be gearing up to extend its slide from the yearly high (1.3483), as price carves out a Bear Flag continuation pattern just above the sentiment-defining 200-day moving average (1.2760).

With both the RSI and MACD indicators tracking below their neutral midpoints, the path of least resistance looks to be lower.

Inability to break above the psychologically imposing 1.30 level could signal the resumption of the downtrend extending from the September high (1.3483), with a break below flag support (1.2762) probably igniting an impulsive downside push to test support at the 61.8% Fibonacci (1.2613).

Conversely, a daily close back above the August low (1.2981) could encourage would-be buyers and bring about a retest of the March high, if GBP/USD can overcome 21-DMA resistance (1.3093)

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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