GBP/USD Forecast: Fakeout at 1.37? Initial surge may prove short-lived despite good reasons to rise

  • GBP/USD has been advancing amid bond-related dollar weakness and BOE hawkishness. 
  • Concerns around coronavirus and Brexit may cause a downside correction.
  • Tuesday's four-hour chart is showing that cable is entering overbought conditions.

First impressions can sometimes be deceiving – and GBP/US potential move above 1.37 may also prove a selling opportunity. Apart from entering oversold conditions (see below) there are reasons for a pause after the justified advance. 

Why GBP/USD has advanced

Pound/dollar received a dual boost on Tuesday. First, Bank of England Governor Andrew Bailey stated that negative interest rates are "controversial" – seeming to put the discussion to rest. The specter of sub-zero rates has been weighing on sterling since June 2020 and shelving the idea removes one downside risk.

The second booster came from a ten-year Treasury auction in the US. Investors were eager to purchase American debt in a reversal from the sell-off in previous days. Prospects of massive stimulus – following Democrats' win of effective control of the Senate – had triggered a rise in yields and the dollar and the drop in returns prompted profit-taking. 

Investors have also taken note of the UK's accelerated vaccination campaign – Britain administered more jabs than all of continental Europe. 

Why GBP/USD may retreat from current levels

Coronavirus continues hitting the UK hard – with hospitals using more and more ventilating machines for severely ill patients. Cases have been dropping in recent days, but that is probably a result of the "weekend effect" – administrative bottlenecks on non-working days result in fewer reported infections. Wednesday's data may prove more worrying.

Another reason is Brexit – which is not over for the services sector. While the EU and the UK agreed on how to manage goods, they left the larger services sector to future talks. These negotiations begin on Wednesday with little appetite from Brussels to make concessions on finance – Britain's critical export sector. Any acrimony could hurt the pound. 

In the US, a 30-year bond auction is scheduled for later in the day, and if demand is not as high as in the previous one, the dollar could rise.

Federal Reserve officials Lael Brainard and Richard Clarida are scheduled to speak late in the day and they could repeat the message that tapering the bank's Quantitative Easing scheme is not on the cards. Nevertheless, the mere talk of reducing more money printing rather than expanding it could be dollar-positive. 

US inflation figures are also of interest. The headline Consumer Price Index is set to show a small pickup. 

See US CPI December Preview: Markets take the Fed's cue and look away    

What about the historical political drama in Washington? The House of Representatives may impeach President Donald Trump for incitement of insurrection after Vice-President Mike Pence rejected calls to invoke the 25th Amendment to remove his boss from office.

Concerns about violence ahead of President-elect Joe Biden's inauguration are elevated, but markets are focusing on the incoming administration's economic priorities rather than the last moves by the outgoing one. 

GBP/USD Technical Analysis

Pound/dollar continues trading in an upwards channel and is nearing the 2021 peak of 1.3705 – also the highest since 2018. While momentum on the four-hour chart is positive, the Relative Strength Index is hitting the 70 level – entering overbought conditions. That may result in a downside correction. 

Beyond 1.3705, the next levels to watch are 1.3730 and 1.3810, last seen in 2018. 

Looking down, support awaits at 1.3680, a swing high from last week, followed by 1.3640 and 1.3545. 

GBP/USD Price Forecast 2021: Cable braces for calendar comeback amid three exits

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