GBP/USD: Bulls taking back the baton, but bearish bias persists to 1.21 handle

GBP/USD has been quite active towards the end of the week, with a steep decline yesterday to a 27-month low, while, today, a solid rebound of almost 1  |  18/07/2019 18:31

• GBP/USD has rallied from 27-month lows on solid data and positive Brexit noise.
• Still room to the upside despite a bearish bias to below 1.22 handle.

GBP/USD has been quite active towards the end of the week, with a steep decline yesterday to a 27-month low, while, today, a solid rebound of almost 100 pips. UK data was ignored at the start of the week, with Tuesday's earnings above forecast and unemployment coming in solid.

However, the talks of the removal of the Irish backstop from any deal resulted in a drop to a fresh 2019 low vs the buck, the lowest since April 2017 - The candidates to replace PM May are indeed more aggressive with their tactics and the likely election of Boris Johnson as the next Conservative leader will add pressure to GBP - both potential leaders, Hunt and Johnson, have said that PM 'May's deal is dead'.

However, the bearish tone around the Dollar has started to factor in on the upside since Trump made warnings over more tariffs on Chinese imports and given the possibility that the Dollar could be used as an additional weapon has brought to light the prospects of a currency war which would be mean a soft dollar policy and less demand for it. Steven Mnuchin, Secretary of the Treasury, made a crafty statement on the matter saying that there will not be any change in Dollar policy, 'as of now'. 

UK data continues to impress

Today, GBP/USD ben able to recover, with recent data now being factored in as more positive Brexit headlines start to trickle through again. Solid data in retail sales contributed to the surge, just 3 pips shy of a full 100 pip rally. 

"June’s 0.9% bounce in UK retail sales (excluding fuel) suggests that the better real wage growth backdrop may be translating into stronger demand among shoppers," analysts at ING Bank explained, adding,however," it’s worth noting that June’s rise follows two consecutive month-on-month declines during April and May. The underlying drivers of June’s increase were also fairly mixed – second-hand stores reportedly were one of the best performers, while department stores saw the sixth consecutive month-on-month decline in sales."

Brexit uncertainty to weigh

The pound also got a lift after Ireland's PM said that the border issue could be resolved. Also, the EU's Barnier was following up with a will to find alternatives to the Irish backstop. However, the risks to our GBP forecasts remain on the downside, stemming from both risks of a hard Brexit or early elections. The likely confirmation of Boris Johnson as the next Conservative leader and thus prime minister next Tuesday won’t be supportive ahead of the Conservative party conference in late September. There are even now prospects of yet a further extension beyond  the31 October Article 50 extension deadline with the appointment of the new President of the European Commission, Ursula von der Leyen, who said in her subsequent speech that she 'stands ready for a further extension to the withdrawal date should more time be required for a good reason."

Easing Cycle? Not at the BoE

As far as the BoE, we are indeed encroaching on a new easing cycle across the spectrum of global central banks and world economies. However, analysts at ING Bank argued that it is too soon to be thinking of rate cuts in the UK: "We think the fact that wage growth has been accelerating means it is too early to be discussing rate cuts in the UK (markets are now pricing a 50% chance of easing this year). But equally, with Brexit uncertainty set to weigh on both consumer and business activity over coming months, we think monetary tightening is also pretty unlikely during 2019."

GBP/USD levels

GBP/USD’s new low was not been confirmed by the daily RSI and divergence assisted in speculative longs stepping in. However, the market now stays offered below the 1.2594 downtrends, according to analysts at Commerzbank who site below 1.2359, "we have very little support until the 1.2108, the 78.6% retracement of the entire move up from the 2016 low." 

In the immediate term, however, 1.2457 comes in as the 38.2% Fibo of the 12th July to recent lows retracement while a continuation to the upside, stop territory comes in between 1.2500 and 12530 - So there is prospects of a short squeeze still to come until attention can be reverted back to the downside bias.