GBP/USD struggles to retake 1.2100 as UK politics, Brexit woes battle sluggish USD

• GBP/USD fades the previous day’s corrective pullback, recently bounces off daily low.
• Impending concerns over UK economic conditions amid political vacuum, Brexit-led red tape weighs on cable.
• US dollar struggles as yields fail to recover ahead of the US inflation.
• Second-tier US data, UK’s political and Brexit headlines will be crucial for near-term directions.

GBP/USD picks up bids to 1.2085 to reverse the early Asian session losses during the initial European morning on Tuesday. The cable pair’s latest previous weakness could be linked to the political and Brexit-linked worries in the UK. However, the US dollar’s failure to rebound, amid sluggish yields, joins the firmer UK data to favor the quotes’ recent bounce.

Earlier in the day, the UK’s BRC Like-for-Like Retail Sales for July rose 1.6% YoY versus -8.4% expected and -1.3% prior. Even so, the Financial Times (FT) said, “UK consumer spending defied talk of recession in July, data from industry bodies showed on Tuesday, but it still failed to match the pace of overall inflation.”

On the other hand, UK Prime Minister’s (PM) race appears to pose bigger challenges to the British economy as Reuters mentioned, “Prime Minister Boris Johnson came under heavy criticism on Monday for allowing a political vacuum at the heart of his government to threaten an even deeper economic crisis in Britain before his successor takes office in September.” The reason could be linked to the UK PM Boris Johnson’s refusal of the new cost of living measures until the successor takes office.

Elsewhere, Brexit woes and the Bank of England’s (BOE) gloomy economic outlook weigh on the GBP/USD prices. “Portugal's border agency SEF has faced criticism for delays in issuing post-Brexit ID cards to thousands of British nationals in the country, putting the spotlight on a structural problem that has affected various other migrant communities for years,” said Reuters.

It should be noted that the US 10-year Treasury yields remain inactive at around 2.75%, following nearly seven basis points (bps) of the downside on Monday and a 14-bps run-up on Friday. The same challenges the US Dollar Index (DXY) ahead of the US Nonfarm Productivity and Unit Labor Costs for the second quarter (Q2). Forecasts suggest that the US Nonfarm Productivity could improve to -4.6% from -7.3% prior while Unit Labor Costs may ease to 9.5% versus 12.6% in previous readings.

Other than the US data, headlines surrounding UK politics, Brexit and the US-China tussles over Taiwan should be watched carefully ahead of the US Consumer Price Index (CPI) for July, up for publishing on Wednesday.

Technical analysis

GBP/USD pokes the 200-SMA support while fading the bounce off the 38.2% Fibonacci retracement of the June 16 to July 14 downturn. Given the bearish MACD signals and the recently downward sloping RSI (14), the pair is likely to remain pressured.

However, the aforementioned key SMA and the Fibonacci retracement levels, respectively neat 1.2060 and 1.2000, will be tough nuts to crack for the bears before retaking control.