GBP/USD: what prevents the pound from spreading its wings?

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GBP/USD continues to trade near 4.5-month lows. The continuing uncertainty surrounding the future relations between the UK and the European Union, as well as expectations regarding the interest rate cut by the Bank of England, are putting pressure on the pound.

About 100 British officials went to Brussels to participate in the first round of negotiations with EU representatives, which should last until Thursday. They will discuss annual trade and close ties in the field of security. At stake is a half-trillion-euro relationship.

The EU wants to give the United Kingdom favorable access to a single market in exchange for guarantees that London will prevent dumping.

British Prime Minister Boris Johnson has already stated that the country does not want to be bound by EU rules or the jurisdiction of its highest court. The EU believes that this is necessary to ensure fair competition.

Being near the lowest pound values over the past four and a half months, the pound is also held by increased fears about the spread of the coronavirus.

Signs that the impact of the new virus at the global level is beginning to affect production recovery in the UK after the December MP elections came on Monday, as local manufacturers reported large delays in their supply chains.

According to IHS Markit, the business activity index (PMI) in the country's manufacturing sector rose to 51.7 points in February compared to January 50.0. However, the indicator was below the forecast of 51.8 points and a preliminary estimate of 51.9.

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The BoE said it was working with the British Department of the Treasury and international partners to ensure that all necessary measures were taken to protect the banking system and the economy as a whole from the effects of coronavirus.

The derivatives market lays in the quotes with a more than 80% probability of lowering the interest rate BoE by 25 basis points at the March meeting.

"We believe that the Bank of England will reduce the interest rate by 0.25% at the next meeting, which will be held March 26. We also expect that the state budget, which will be presented on March 11, will be largely aimed at containing the coronavirus," analysts at ING said.

As for the technical picture, it has changed little since last week. After Friday's bearish breakout of the GBP/USD two-month downward trend channel, the mood remains downward.

The absorption of this year's lows in the region of 1.2750 will strengthen the bearish forecast and the pair can aim for the round 1.2700 mark. From here, sellers will head to the next important horizontal support at 1.2645.

Only a breakout of the 1.2875–1.2880 area can neutralize the bearish forecast and throw the pair above 1.2900. This will clear the bulls' path to the important psychological mark of 1.30, where the 50-day moving average passes, which makes this area a key turning point.

The material has been provided by InstaForex Company - www.instaforex.com