GBP/USD Forecast: Ready for a dead cat bounce as a hard Brexit looms

GBP/USD has been recovering from the fresh six-month lows it hit on Friday.
Brexit uncertainty looms large over the pound.
Monday's four-hour chart points to oversold conditions that imply a bounce – albeit a temporary one.

Yohay Elam FXStreet

The pound's vulnerability has been exposed. When the US reported an increase of 224,000 jobs in June – significantly above 160,000 projected – the greenback gained ground across the board. However, some currencies have weathered the storm better than others and Sterling has been on the losing side. GBP/USD fell below 1.2500, the lowest since January.

While cable has recovered since, but the recovery may be easily labeled as a "dead cat bounce." as troubles loom large over the British economy. Last week's forward-looking purchasing managers' indices by Markit/CIPS have shown that the UK economy has probably contracted in June – opening the door to an outright recession. Mark Carney, Governor of the Bank of England, has also expressed concern by noting a "sea change" in the global economy.

Moreover, the political landscape has yet to improve. Both Boris Johnson – the leading candidate to become PM – and his rival Jeremy Hunt are open to leaving the European Union without an accord. Markets are gradually pricing that dreaded option in.

These UK placed the pound in a weak spot ahead of the US data. And now, markets await the response from the US Federal Reserve to the upbeat figures. Jerome Powell, Chair of the Federal Reserve, will testify on Capitol Hill on Wednesday and tension is already mounting.

With few events on the calendar today, politics may set the tone for the rest of the day.

GBP/USD Technical Analysis

GBP/USD is suffering from downside momentum and trades below the 50, 100, and 200 Simple Moving Averages. On the other hand, the Relative Strength Index (RSI) on the four-hour chart is below 30 – suffering from oversold conditions – and indicating a bounce.

Initial support awaits at the June low of 1.2505. Friday's six-month trough of 1.2480 is critical support. The 2019 low of 1.2445 is next.

Resistance awaits at 1.2560, which provided support in early July and then by 1.2605 which capped it around the same time. Next, e find another support-turned-resistance at 1.2660, before the next peak at 1.2740.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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