Traders take profits during the last day of the trading week, which is why the dollar has halted its offense throughout the market. Moreover, almost all dollar pairs show a correction after attacking the US currency for several days. This correction is clearly shown in the pound/dollar pair: buyers of this pair were able to "pull" the price from two-month lows and push it towards the 28th figure.
This price dynamics is not only due to the temporary weakness of the dollar. The pound also received unexpected support from British lawmakers, who decided not to rush the adoption of the controversial bill that cancels many points of the Brexit agreement. Thus, in my opinion, the current correction should be used as a reason to open short positions, as traders' optimism looks too early and mostly unfounded.
On another note, London and Brussels still have different opinions regarding the negotiation process. In this context, the draft law "On the UK Internal Market" is optional. For example, if it is adopted (in the form in which it now exists), the Europeans are likely to immediately withdraw from the negotiation process. Such threats were voiced at the level of the leadership of the European Commission. However, if the British parliament puts the bill on hold until the EU summit (these rumors served as a reason for the pound's correction), then this will not solve the problem in general and will not "force" Europe to make a compromise to Boris Johnson.
In particular, French Deputy Minister for European Affairs, Clement Beaune, called London's actions ordinary intimidation and tactical positioning. According to him, the UK has recently "sent destructive signals", but Europe does not intend to yield to this. It should be noted here that the French are generally the most eager opponents of the British on the Brexit issue. There is one time Emmanuel Macron was the only one among all European leaders who did not agree to grant Britain an extension to continue negotiations until recently. And only on the day of the key summit that Paris yielded to pan-European pressure and approved the request of Theresa May.
In other words, the Brexit issue is not the pound's "ally", even despite the readiness of British parliamentarians to postpone the final vote on the controversial bill. In any case, the negotiators lack time to agree on all the controversial points of the trade deal before January 1, while Boris Johnson refuses (at least for now) to make a proposal to prolong the transition period. To extend this period, the consent of all EU members is needed, while the French are already questioning the advisability of such a decision. Therefore, the temporary lull on the Brexit topic should not attract market participants, since the main battles are still ahead, and the pound will be under significant pressure until we reach the climax.
Moreover, it can be recalled that the Bank of England reiterated the negative rate at the last meeting. Yesterday, Central Bank's head, Andrew Bailey said that "negative rates are still in the tool kit." According to him, examples from other countries have shown that rates below zero "can be successfully used". However, he added that it would be foolish not to consider this option among the others. Let me remind you that earlier he was more skeptical about this issue, pointing out the side effects for the banking sector. However, he admitted yesterday that the members of the Committee did not reach agreement on the possibility of using rates below zero. But the general message is quite obvious — Bailey is gradually, but quite consistently, preparing the markets for the fact that the British regulator may decide to go into a negative zone on the issue of rates.
Therefore, short positions in the pair remain a priority in the medium-term. The pound reacts instantly to the current news, but in general, things are gloomy for the pound: the closer the EU summit on Brexit is (approximately the last days of October), the tougher the rhetoric of politicians (both from Britain and the EU side) will be.
As a result, it will be hard for buyers of GBP/USD to prove themselves, especially amid the USD general strengthening. The nearest target for the decline is 1.2680, which is located in the lower line of the Bollinger Bands indicator on the H4 time frame. The next support level is much lower — around 1.255. It is also at the lower line of the Bollinger Bands, but already on the D1 time frame.
