- GBP/USD seems to have gone into a recovery phase.
- GBP/USD could target 1.3500 if buyers manage to flip 1.3440 into support.
- EU and UK are set to intensify Brexit talks this week.
GBP/USD has started to inch higher to start the week as the dollar rally seems to have cooled off amid retreating US Treasury bond yields. With investors shifting their focus to upcoming Brexit talks, the pair looks to extend the technical correction.
David Frost, the British minister responsible for implementing the Brexit deal, said last Friday that they will engage in talks with the EU, specifically on the Northern Ireland protocol.
There is still a considerable risk that the UK could opt out to trigger Article 16 in case sides fail to come to terms. The EU made it clear that they will retaliate in a proportionate way and even threatened to shelve the Brexit deal as a whole. That would be the nightmare scenario for the British pound, which already suffered heavy losses following the Bank of England's (BoE) decision to leave its policy rate unchanged earlier in the month. On the other hand, a positive outcome could open the door for a more decisive GBP/USD recovery.
Later in the session, the Federal Reserve Bank of New York's Empire State Manufacturing Index will be looked upon for fresh impetus. The 10-year US Treasury bond yield is edging lower after last week's upsurge and limiting the greenback's upside potential for the time being.
On Tuesday, the UK's Office for National Statistics will release labour market data for October but GBP/USD reaction could remain short-lived.
GBP/USD Technical Analysis
On the four hour chart, GBP/USD is testing the upper limit of the descending regression channel coming from late October. In case buyers manage to lift the pair above 1.3440 and start using that level as support, the next target on the upside could be seen at 1.3500 (psychological level, 50-period SMA). Above that hurdle, strong static resistance seems to have formed at 1.3570.
In the meantime, the Relative Strength Index (RSI) indicator on the same chart is holding near 50, suggesting that sellers are staying on the sidelines for the time being.
Supports are located at 1.3400 (psychological level), 1.3360 (static level, 2021 lows) and 1.3300 (psychological level). The bearish pressure is likely to ramp up if investors start pricing the possibility of the UK triggering Article 16.
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