GBP/USD: Elliot wave pattern points to a rebound from 6-week low

The British pound (GBP/USD) dropped to its lowest level in six weeks as traders continued to worry about Brexit. The currency is down by 0.25% against the US dollar and by 0.60% against the euro.

UK set to break international law

The sterling is falling as traders react to news that the Boris Johnson administration is set to break international law on Brexit.

The country is aiming to do this by passing the international market bill, which will be published today. The goal of this bill is to smoothen business movements between England, Scotland, Wales, and Northern Ireland after the UK separates fully from the union. Most importantly, the bill seeks to address whether Northern Ireland will be bound by custom rules when the UK leaves.

According to government officials, this move will clearly and consciously undermine the treaty that Boris Johnson signed last year.

The decision to pass this bill comes at a time when the UK is hosting the eighth round of Brexit talks in London. And analysts don’t expect the two sides to reach an agreement because of their significant differences. Indeed, chances of a deal have been dealt a blow by the decision by Johnson to support the bill.

The challenge for the UK is that the country is mostly dependent on the European Union. According to the government, the country exports more than 45% of its goods to the EU. As such, without a deal, the EU will be free to add tariffs and non-tariff barriers to UK goods. Subsequently, many companies that sell goods to the EU have warned that they will leave the country. Some have already left. A report by the UN said that the UK will risk losing more than $32 billion in annual trade.

UK has more challenges ahead

Brexit is not the only reason why the GBPUSD pair is falling. Analysts believe that the country faces a serious challenge in the coming month. The biggest one will be that the government will end its furlough program in October, which risks pushing the unemployment rate to more than 7%.

For starters, the UK government has been paying salaries to 80% of the workforce as part of its stimulus package. In a statement, an analyst at Nomura said:

“The end of the furlough scheme in October is likely to raise unemployment from below 4% to anywhere in the range of 7.5-12%. That alone is likely to cause a substantial drag on UK growth. There is also the potential for a tax raise in the autumn budget and a long winter of COVID-19 cases and shutdowns providing a drag on activity too.”

GBP/USD technical outlook

The daily chart above shows that the GBP/USD pair formed a shooting star pattern on 1^st September when it reached a YTD high of 1.3480. Since then, the pair has dropped for the past five consecutive days. It has also moved below the 25-day exponential moving averages and moved below the 78.6% Fibonacci retracement level.

Most importantly, the pair seems to be in the fourth phase of the Elliot wave, which means that the pair is likely to bounce back above the YTD high of 1.3480.