GBP/USD Forecast: Overbought, so what? Boris' Brexit deal looks closer, nothing else matters

GBP/USD has been rising on hopes for a Brexit deal following progress in talks.
Talks in Brussels overshadow other events such as the Fed decision, US retail sales, PMI and vaccine hopes.
Wednesday's four-hour chart is showing cable is nearing overbought conditions.

Yohay Elam FXStreet

Will the EU and the UK walk together down the aisle? Perhaps a marriage metaphor is not the best when discussing divorce, but it echoes words of a "path to an agreement" as European Commission President Ursula von der Leyen said. The top-ranking official added that there are still differences. A British official later responded by saying that both sides are still "very far apart" echoing Prime Minister Boris Johnson's words on Sunday when agreeing to extend talks.

Yet it is probably Johnson who has allowed for a breakthrough – by ceding ground on the Level-Playing Field (LFP) and accepting some form of alignment mechanism to EU rules. According to reports, the PM hardened his stance on fisheries – a minuscule yet politically sensitive topic.

Sterling has been responding to every Brexit-related headline, including rumors of an imminent accord on Wednesday – which proved wrong. Nevertheless, the silence from the negotiators and especially the usually pessimistic Chief EU Negotiator Michel Barnier, speaks loud.

The recent rises imply that a breakup of talks would trigger a collapse in the pound, but how would it respond to a Brexit deal announcement? Some resistance in recent days implies that a deal is not fully priced in and there is more room to rise – not a "buy the rumor, sell the fact" response.

Outside Brexit News

Wednesday is a busy day for markets. Markit's preliminary UK Purchasing Managers' Indexes for December were mixed and inflation missed estimates with a yearly increase of 0.3%. In the US, PMIs are overshadowed by Retail Sales figures for November, which are set to reflect a virus-related slowdown.

See US November Retail Sales Preview: If consumer spending fades?

The main event of the day is the Federal Reserve's decision and speculation about the bond-buying scheme is rife. There is some chance markets would be unhappy with the Fed staying put. New forecasts are eyed.

See

London has entered severe Tier 3 restrictions on Wednesday and New York City may also follow with a lockdown. The depressing surge in coronavirus statistics battles progress on a vaccine – the US FDA has published a favorable view of Moderna's covid vaccine, paving a path to approval.

Optimism about a fiscal deal in the US has weighed on the US dollar. Will white smoke come out in Washington before it is seen in Brussels? Both deals would be GBP/USD-positive – yet Brexit remains the critical topic.

GBP/USD Technical Analysis

The Relative Strength Index on the four-hour chart is nearing 70 – on the verge of entering overbought conditions. Will cable correct lower? A Brexit deal may overwhelm the RSI. Pound/dollar remains above the 50, 100 and 200 Simple Moving Averages and momentum remains positive.

Resistance awaits at 1.3520, the daily high, followed by the 2020-peak of 1.3540. Further above, 1.36 and 1.3730 are lines last seen in 2018.

Support is at 1.3480, a peak that was seen last week, followed by 1.3450, a high point from this week. Further down, 1.34 and 1.3270 are the next lines to watch.

More GBP/USD Three reasons to expect a sustained Santa rally for sterling

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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