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  • GBP/USD has rallied beyond previous yearly highs to test the 1.3500 level for the first time since December 2019.
  • Bullish Brexit bets are driving the move amid indications of progress on the issue of level playing field.

GBP/USD has rallied hard on Thursday and in recent trade surpassed the previous yearly high at 1.3485 to print new yearly highs at 1.3500. A combination of bullish Brexit bets and continued USD weakness is driving the upside and the pair trades with gains of over 120 pips or nearly 1.0% on the day.

GBP dominates G10

The GBP rollercoaster continues amid a revival in hopes that the EU and UK might be able to reach a deal on their future trading relationship in the coming days; reports that significant progress has been made on the issue of level playing field (one of the three key outstanding issues in talks) has injected GBP with bullish sentiment and the currency is currently the best performer out on the day in the G10.

A bombardment of commentary on the state of talks from a variety of journalists and sources has delivered mixed messages, but a few underlying factors seem to be consistent across reporting; significant differences remain and talks appear to be coming to their climax (with either a deal or complete collapse of talks likely by the end of the week). Meanwhile, hard-line EU countries led by the French are still pushing for further concessions from the UK.

Elsewhere, a surprising large upwards revision to final UK services PMI numbers for November during the early part of Thursday’s European session (to 47.6 from 45.8) might also be helping lift some concerns about economic weakness during November’s national lockdown, which ended on Wednesday.

Broad USD slide continues

Contributing to GBP/USD upwards surge on Thursday has been a continuation in the broad USD decline, with the Dollar Index (DXY) sliding to the 90.50 mark in recent trade, down nearly 1.4% now on the week.

No specific catalysts appeared directly responsible for USD’s early decline on Thursday, though a recent batch of strong US services PMI data for November appears to have spurred further losses;

Markit released its final services PMI reading for November, which was revised higher to 58.4 from the preliminary estimate of 57.7, the highest reading in over five years. Shortly after, the Institute of Supply Management released their estimate of services PMI for November, which came in at a solid 55.9, only very marginally below expectations for 56.0. Importantly, the employment subindex remained above the 50 mark, implying that service sector employment was in expansion in the month just gone despite the worsening virus situation.

Going into the data, some had argued that strong numbers might be USD bullish as it might discourage the Fed from providing further accommodation at the FOMC meeting later this month. However, this has not been the case.

US equity markets were given a boost by the data, with the S&P 500 hitting fresh all-time highs in its aftermath. Risk on flows have also been seen in FX markets, hurting demand for safe-haven currencies like the USD.

GBP/USD testing 1.3500 for the first time since December 2019

GBP/USD has surpassed its previous year-to-date highs at 1.3485 in recent trade and hit the 1.3500 level, which was last hit in wake of the December 2019 UK general election after the Conservative Party won a much larger than expected majority. Just beyond the 1.3500 level is the post-election high at 1.3516, which ought to offer solid resistance. Should this level go, the next key area of resistance to watch out for is the February 2016 lows just above 1.3700.

Meanwhile, if GBP/USD goes into consolidation close to the 1.3500 level or just under it, the previous yearly high at 1.3485 might offer some support, as might Tuesday’s and Wednesday’s highs at 1.3440.