- Since failing to break above monthly highs at 1.3315 and dropping below 1.3000, GBP/USD has seen further downside amid a mild USD recovery.
- The pair still trades with gains on the day, however, amid Brexit optimism and a softer USD.
- GBP/USD’s near-term technical picture continues to look bright, as the pair remains within bullish upwards trend channels.
GBP/USD tested its previous monthly high at 1.3315 earlier on during Wednesday trade but was rejected, with the pair swiftly falling back below the 1.3300 level. In recent trade, GBP/USD has been seeing further downside amid a mild USD recovery and the pair is now roughly 50 pips down from earlier highs. Still, GBP/USD holds onto gains of around 25 pips on the day, or 0.2%.
GBP buoyed by weaker Brexit hopes, weaker USD
GBP has been a solid performer this week, with GBP/USD still trading over 100 pips above Monday lows of around 1.3160. Brexit optimism has been one factor; reports earlier on in the week suggested that the two sides are zeroing in on a deal and reports during Wednesday’s Asia session suggested that the French have “accepted” they are not going to have the same access to UK fishing waters as under the common fisheries policy. In sum, the feeling in the market is that the likelihood of a deal has increased this week.
However, in the absence of official confirmation that gaps on the issues of fisheries, level playing field and state aid have been bridged, it is perhaps unsurprising to see GBP/USD fail in its attempts to break above key resistance at 1.3315.
Tangible evidence that a deal is actually at hand may be needed in order for the currency to cross above this level. Traders are pointing to Friday, when EU Brexit Negotiator Michelle Barnier is set to update EU ambassadors (and the public) on the state of talks, a potentially pivotal moment.
Also supporting GBP/USD has been broadly softer USD on the week. USD is enjoying some upside, a mild correction, in recent trade. Here are few reasons why USD has been under pressure this week…
1) Pandemic – Regarding the pandemic, USD has seen minor strength in wake of recent vaccine updates, but these bouts of strength (seemingly driven by higher US yields at the time) have proven short-lived. Perhaps that is reflective of markets focusing more on the long-term economic impact of a faster global immunisation programme (sooner end to the pandemic, faster recovery in 2021). If that implies stronger global growth relative to US growth in 2021, then vaccine news is actually more likely to end up a USD negative, some participants may argue. Meanwhile, the major economy seeing the worst deterioration in its economic outlook right now due to Covid-19 is the US (New York just announced a closure of schools), given that Asia is doing ok and Europe is already in lockdown and seeing Covid-19 numbers stabilise. Another reason not to favour USD.
2) US Politics – Markets are highly confident that Joe Biden will be President as of 21 January, even though the result has not yet been certified amid the Trump Administrations lawsuits and fraud claims. With the President seemingly more focused on trying to hold onto the Presidency in 2020 which he almost certainly seems to have lost, markets are concerned he might “run amok” in his final weeks and there are already reports pointing to this; last week President Donald Trump was reportedly talked out of authorising a military strike on Iranian nuclear facilities that could have sparked a conflict in the region. Such US political uncertainty might undermine the US dollar’s desirability as a safe haven.
3) Central Bank Divergence – The BoE and RBA have already just eased monetary policy, the BoC, BoJ, PBoC and RBNZ are all on hold and, given very clear guidance that more easing is coming in December, markets largely now price in the coming ECB “bazooka”. Meanwhile, no one is quite yet sure what the Fed is going to do in their December meeting; FOMC speakers (including Fed Chair Powell and Vice Chair Clarida) have all signalled increasing concern for the US economy over the coming months give the worsening virus situation. All have reiterated that emergency liquidity and financing facilities, as well as easy policy, are not going anywhere, but clear signals of what further measures might be on the horizon are yet to come. Thus, if the FOMC is to enact further economic supportive measures over the coming months, USD might yet need to see some further downside in order to price this in.
Short-term GBP/USD bias remains positive
GBP/USD continues to trade within the confines of recent upwards trend channels. In the short-term, the pair remains locked within the upwards trend channel whose upper bounds link the 6 and 9 November lows and the 16, 17 and 18 November highs and whose lower bounds link the 12, 16 and 17 November lows.
Over the longer term, the pair continues to range within an upwards trend channel, whose upper bounds link the 16 September, 21 October, 10 and 11 November highs and whose lower bounds link the 23 and 25 September and late-October/early-November lows.
These trendlines ought to offer the pair decent support, and have proven today to offer significant resistance.
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