GBP/USD Forecast: Sellers eye a drop below 1.3400

GBP/USD has come under renewed bearish pressure ahead of the weekend.
Money markets fully price in a 20 bps BoE hike in December.
EU rules out any compromise on ECJ's involvement in trade regulation.

Eren Sengezer FXStreet

The British pound has lost its strength ahead of the weekend and the technical outlook points to a bearish shift in GBP/USD. Investors will keep a close eye on headlines surrounding the negotiations on Brexit's Northern Ireland (NI) protocol.

Following the latest talks in Brussels on Friday, UK Brexit Minister Lord David Frost said that they had not yet made substantive progress on the NI protocol issues. In an interview with BBC on Sunday, European Commission vice-president Maroš Šefčovič called upon the UK to end the "political posturing" and accept that the Brexit deal will not be renegotiated. Moreover, Ireland’s Foreign Minister Simon Coveney said that the EU will not compromise on the involvement of the European Court of Justice (ECJ) in trade regulation.

Meanwhile, the CME Group's BoEWatch Toll shows that markets now fully price in a 20 basis points Bank of England rate hike in December, suggesting that the pound is unlikely to receive a boost from BoE commentary at this point.

On the other hand, the greenback continues to find demand with investors considering an increasing probability of the Fed raising its policy rate by mid-2022. Federal Reserve Vice Chair Richard Clarida said on Friday that policymakers could discuss speeding up the pace of asset taper in the upcoming meeting.

GBP/USD Technical Analysis

With Friday's sharp decline, GBP/USD broke below the ascending trend line coming from November 12. Additionally, the Relative Strength Index (RSI) indicator on the four-hour chart continues to push lower toward 40, confirming the view that bearish momentum is picking up steam.

On the downside, 1.3400 (Fibonacci 23.6% retracement of the November 9-12 drop) aligns as the first technical support. In case sellers flip that level into resistance, GBP/USD could target fresh 2021-lows near 1.3350.

Near-term resistance seems to have formed at 1.3440 (Fibonacci 38.2% retracement) before 1.3460/70 (Fibonacci 50% retracement, 50-period SMA) and 1.3500 (psychological level).

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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