GBP/USD Forecast: Potential upside from Brexit talks competes with coronavirus concerns

Lofty rhetoric about Brexit – weighing on the pound – has competed with coronavirus headlines, which mostly had a positive effect on GBP/USD. As official EU-UK talks begin, a long list of economic figures is also eyed.

This week in GBP/USD: Coronavirus vs. Brexit

Markets seem to have finally come to terms with the coronavirus as the disease spread in northern Italy and to additional countries in Europe. Stocks plummeted, and investors rotated to bonds, eventually sending the US ten-year yields to the lowest on record, below 1.30%. In turn, reduced returns on American debt made the dollar less attractive and supported GBP/USD.

Investors are increasingly pricing rate cuts by the Federal Reserve. However, officials at the bank have only stated that they are watching the situation closely while they stick to their "wait-and-see" mode. 

Nevertheless, the spread of the virus has caused worries in the UK as well. A large group of British holidaymakers has been quarantined in their hotel in Tenerife, Canary Islands. Several firms in London have been asking employees to work from home, and others have expressed concern about their profits. 

Brexit remained in the news as the EU published its 46-page mandate for talks. The paper includes demands for a "level-playing field" from Britain, which London sees as restrictive and against the point of Brexit – setting one's own rules. 

The UK government took one step forward by hinting they would abandon talks if no progress would be made by June. Prime Minister Boris Johnson's hard-line weighed heavily on sterling. 

Michel Barnier, Chief EU Negotiator, has provided soothing words by saying that Brussels is ready to offer the UK "super preferential" access to EU markets. His words may mark a willingness to find a compromise behind closed doors when talks kick off on Monday.

Britain is in a transition period – which means the bloc's obligations and rights continue applying – until year-end. Without an agreement, commerce will be governed by World Trade Organization rules, which are less favorable for the UK.

US data was mostly positive, with Gross Domestic Product confirmed at 2.1% annualized for the fourth quarter. More importantly, Durable Goods Orders rose above expectations, with the nondefense ex-aircraft figure leaping by 1.1% in January.

UK events: Brexit talks in focus

Negotiators from the EU and the UK start post-Brexit finally begin formal talks. The main sticking point is Brussels' demand that the UK follows its rules in return for easy market access. Other topics, such as the status of the financial sector and fisheries are all on the table.

Both sides are set to brief the press – in front of cameras and anonymously – thus moving markets. The pound is likely to rise in response to reports of agreements and retreat if the press discusses angry exchanges. Deals are usually struck closer to the deadline, so expectations are low at this initial stage, leaving more upside room for the pound as the worst may already be priced in.

The UK economic calendar remains light, but Markit's final Purchasing Managers' Index figures for February are of interest. They may consist of downward revisions as the coronavirus scare increased since the initial release on February 21. Both have topped 50 in the preliminary read, signaling modest expansion.

Here is the list of UK events from the FXStreet calendar:

US events: Coronavirus headlines and full NFP buildup

Are the recent falls in markets, bond yields, and the dollar only a temporary correction? Or will fear continue gripping the markets? Additional headlines from all over the world are set to rock markets. The dollar has been moving alongside returns on bonds, but it may shift to attracting safe-haven flows. 

Investors are watching the spread of the disease within developed economies and especially the US. New cases, lockdowns, event cancelations, and profit warnings are all set to move markets. However, without fresh fear, the mood may improve. It is essential to remember that according to data available now, while contagion is high, Covid-19 is less lethal than SARS or Ebola. 

A busy US economic calendar provides opportunities to asses investors' approach and also the state of the US economy. 

For the full report, see: 5 critical (mostly) coronavirus-linked events to rock markets in first week of March

The ISM Manufacturing PMI kicks off the week. Economists expect it to hold above 50 points – indicating expansion for the second month in a row. The employment component serves as a hint toward Friday's Non-Farm Payrolls. 

The second hint towards the NFP is due out on Wednesday – ADP's private-sector job figures. After a leap of 291,000 positions in January, the calendar is showing a return to normal and healthy gains around 200,000. 

ISM's figures for the services sector also serve as a reflection of business sentiment toward the virus. A repeat of January robust 55.5 scores is on the cards. Also, here, the employment component another hint toward the NFP. 

And finally, after an impressive gain of 225,000 positions in January, markets are bracing for an increase of fewer than 200,000 jobs in February. As usual, Average Hourly Earnings are also projected to have a substantial impact on the dollar. Economists estimate that annual wage growth will hold above 3%. 

Here the upcoming top US events this week:

GBP/USD Technical Analysis 

Pound/dollar has dropped below the 100-day Simple Moving Average and continues struggling with downside momentum. It is also trading below the 50-day SMA but above the 200-day one. 

Overall, bears are in the lead. 

The first level to watch on the downside is the early November low of 1.2775, and then by 1.27 – a resistance line in the autumn and also where the 200-day SMA hits the price. 1.2590 and 1.2520 are next.

Resistance awaits at the previous 2020 low of 1.2850 recorded in mid-February. The round level of 1.29 has long been a battle line. It if followed by 1.2940, which provided support several times in January, and then by 1.3020, a recent high. The double-top of 1.3060 is the next level to watch. Further above, 1.3210, 1.3285 and 1.3510 await 1.3510.

GBP/USD Sentiment

Pound/dollar has further room to the downside as coronavirus fears may turn from weighing on the dollar to supporting it through safe-haven flows. 

The FX Poll is pointing to GBP/USD recapturing 1.29 in the short term and reaching 1.30 afterward. Experts have marginally revised their forecasts to the downside but remain relatively optimistic.

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