• Tension rises in trade talks
  • No-deal Brexit is back on the table
  • Positive U.S. economic outlook adding downward pressure on GBP/USD

Earlier this month, GBP/USD rallied to the 1.35 handle, an all-time high level this year. However, that rally was short-lived and GBP/USD took a turn after a couple of major events that took place.

Trade negotiations between the UK and the EU is getting more tense than ever. Both parties have started another round of Brexit trade talk yesterday. To date, not much progress has been made in the finalization of the trade deal. Over the weekend, UK Prime Minister Boris Johnson said that if the trade deal is not finalized by 15 October, the UK will walk away from the EU without one, thus leading to the no-deal Brexit scenario that many is worried about. Also, Johnson is planning to override the Brexit withdrawal agreement that was agreed upon between the UK and the EU last year. To make matter worse, the market is beginning to speculate the possibility of the Bank of England adopting negative interest rate in the scenario whereby there is no trade deal between the UK and the EU. As a result, GBP has plunged more than 200pips against USD over the past two days.

Another factor that is adding downward pressure on GBP/USD is the recent release of positive U.S. economic indicators. The PMI data released by the Institute for Supply Management indicated that in August, the U.S. manufacturing sector expanded at an increased pace while the services sector continued to expand at a similar pace as July. The U.S. non-farm payroll for August was released with pretty decent figures, specifically the unemployment rate which declined more than the forecasted figure. Although there is some skepticism in the optimism portrayed by the report (you can read a comprehensive analysis on the U.S. jobs report here), GBP/USD still took a stronger hit as compared to the other major currency pairs.

On the technical aspect, our indicators are showing a strong downward momentum. At the moment, the Stochastic Oscillator is indicating an oversold signal of GBP/USD and is likely going to stay oversold for the time being given the likelihood of a no-deal Brexit happening.

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By Gim Hong Lee

Gim Hong has been a full-time currency trader for more than 2.5 years, focusing on day and swing trading of major currencies and their crosses. He is a frequent contributor of currency and economic analysis in Forex Trading Asia. Graduated from Columbia University in the City of New York with a bachelor’s degree in applied mathematics and statistics, the nerdy side of Gim Hong enjoys learning about data analysis, machine learning and their applications in currency trading.

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