GBPUSD Forecast: Transition Period Looms

Dec 5, 2020 | Abundant Insight

With still no agreement in hand, will the GBP resume its rally against the US dollar?

The pound, for most of last week and throughout November, has appreciated considerably against the greenback — 3.74% to be exact. GBPUSD has reached a high of 1.3500 on Friday, a price it hasn’t visited since a year ago. And what’s propelled gains for the pair thus far has been updates about Brexit as the end of the transition period looms for the UK and EU. The PMI numbers for Britain, despite better than forecasts, didn’t do much to cause a significant reaction in the market for the pound. 

What’s caused some slight bearish activity on Wednesday, however, was the UK’s move to approve the emergency use of the Pfizer-BioNTech-made vaccine, making it the first Western country to initiate the progress. Still, there’s just overwhelming dollar weakness against G10 currencies driven mostly by the markets’ increased risk appetite as hopes of an end to this coronavirus nightmare come into view.

In the next few days, the EU Summit on Dec. 10 and 11 highlight further Brexit risks. And while the cable has been seasonally neutral in the month of December for the past ten years, traders willing to bet on the GBP this month will have to keep tabs on the forthcoming negotiations. 

On the chart, it is evident that the cable still has solid momentum going to the upside. It recently closed above a multi-year resistance line that spans July 2018. Still, there are some hints that selling pressure could put a brake on GBPUSD gains, at least for the moment. 

The recent move higher was rejected by the R1 level of the monthly pivot points and resulted in a sort of bearish pin bar at the end of last week’s trading. The Fast Stochastic is also sending a warning that its reading is moving below the overbought level. Of course, the resistance line it freshly breached will serve as a good support level, and the market is bound to test it at some point. A break below that and bears could push prices to 1.33510 and 1.3286.