GBP/USD Analysis: Bulls defend ascending channel pivotal support, at least for now

• A combination of factors prompted some follow-through selling around GBP/USD on Friday.
• Diminishing offset for an imminent BoE rate hike, fresh Brexit jitters undermined the sterling.
• Sustained USD selling, reports of a Brexit compromise helped the pair to gain traction on Monday.

The GBP/USD pair extended its rejection slide from the very important 200-day SMA and witnessed some selling for the second successive session on Friday. The British pound's relative underperformance comes amid diminishing odds for an early policy tightening by the Bank of England (BoE) and fresh Brexit jitters. Against the backdrop of softer UK consumer inflation figures, the disappointing release of UK Retail Sales added to signs of weakness in the economic recovery. This, in turn, forced investors to scale back their expectations for an imminent BoE rate hike move in November.

Apart from this, reports that the European Union could terminate the post-Brexit trade deal if the UK government pulls out of its commitments over Northern Ireland (NI) further weighed on the sterling. British Prime Minister Boris Johnson has threatened to unilaterally suspend parts of the NI Protocol using the powers granted in Article 16 of the pact. Both sides have held crunch talks in a further attempt to resolve the issues. Nevertheless, the pair dropped to a three-day low in reaction to the headlines and seemed rather unaffected by the prevalent US dollar selling bias.

Easing concerns about a credit crunch in China's real estate sector boosted investors' confidence. This, along with a modest pullback in the US Treasury bond yields undermined the safe-haven greenback, though did little to lend any support to the major. Moreover, the markets also seem to have fully priced in the prospects for an early policy tightening by the Fed. This was evident from a rather muted reaction to Fed Chair Jerome Powell's comments on Friday, reiterating that the US central bank will soon begin tapering its massive pandemic-era stimulus.

Meanwhile, positive Brexit-related headlines over the weekend provided a fresh lift to the major on the first day of a new week. The language used by allies of UK Brexit minister David Frost suggested there could be room for a compromise on the issue. There has been media speculation that Frost could support a “Swiss-style” governance arrangement for the NI protocol, though the role of the European Court of Justice remained the biggest sticking point. Apart from this, sustained USD selling assisted the pair to reverse a major part of the previous session's losses.

Moving ahead, there isn't any major market-moving economic data due for release on Monday, either from the UK or the US. Hence, the market focus will remain on fresh Brexit developments. Apart from this, the broader market risk sentiment will influence the USD price dynamics and provide some impetus to the major.

Technical outlook

From a technical perspective, last week’s corrective pullback stalled near the lower boundary of a three-week-old upward sloping channel. The mentioned support, currently around the 1.3735 region, should now act as a key pivotal point for short-term traders. A sustained breakthrough, leading to a subsequent slide below the 1.3700 mark will shift the near-term bias in favour of bearish traders. The pair might then accelerate the fall towards intermediate support near mid-1.3600s before eventually dropping to the 1.3600 round figure.

On the flip side, any subsequent move beyond the 1.3800 mark might continue to confront a stiff resistance near a short-term descending trend-line extending from late July, around the 1.3825 region. This is closely followed by the 1.3850-60 confluence barrier, comprising the very important 200-day SMA and the top end of the ascending channel. A sustained strength beyond will set the stage for additional gains and allow bulls to aim back to reclaim the 1.3900 mark. Some follow-through buying has the potential to push the pair further towards the 1.3960-65 resistance en-route the key 1.4000 psychological mark.