GBP/USD Forecast: Three reasons for the rally, two things to watch

"UK rollout of Covid vaccine could start before Christmas" – Hopes for a vaccine have been the main reason for the safe-haven dollar's decline and the pound's surge. Yet also other developments are positive for the pound. 

Before discussing the upside, there is a duo of downside risks worth tackling as GBP/USD hits a two-month high.

Two risks

1) Brexit: The House of Lords amended the controversial Internal Markets Bill (IMB) which knowingly violates the Brexit Withdrawal Agreement. However, Prime Minister Boris Johnson is set to push through with the accord. That may derail talks with the EU – and also anger president-elect Joe Biden. Democrats have warned Britain not to risk the Good Friday peace agreement in Ireland, and the IMB poses such as a threat.

On the other hand, EU representatives are in London for further talks on future relations, providing hopes for progress.

2) US Elections: Biden has unveiled a coronavirus taskforce and speculation is mounting about his appointments to economic posts, such as Treasury Secretary. Another risk comes from President Donald Trump, who is unlikely to concede and continuing floating unsubstantiated claims of fraud. 

Most of the counting is over, but if further tallies cast doubts on the outcome, the safe-haven dollar could rise. 

Three reasons to be cheerful

1) Vaccine optimism: Producing immunization en masse and storing it at around -80 degrees are considerable tasks, but the big breakthrough – Pfizer and BioNTech's 90% efficiency announcement – has already happened. Developing a vaccine is no small task. Moreover, Pfizer is using the mRNA approach used by Moderna, AstraZeneca, and Johnson&Johnson. That raises hopes that these companies could also announce success shortly. 

2) Upbeat UK labor market: Britain's Unemployment Rate rose to 4.8% in September, yet that is still low and as expected. Wage growth accelerated to 1.3% beating estimates, and most importantly – jobless claims surprised with a fall of nearly 30,000 in October. Alongside the extension of the furlough scheme, the British economy seems well-positioned to weather the current lockdown.

3) Favorable technical picture: Pound/dollar is benefiting from upside momentum on the four-hour chart – and the Relative Strength Index is below 70, thus outside overbought conditions. The currency pair is also trading above the 50, 100, and 200 Simple Moving Averages. 

Resistance awaits at the daily high of 1.3255, followed by 1.3320 and 1.3360, levels that played a role in August. 

Support is at 1.3210, a temporary high on Monday, followed by 1.3160 and 1.3120.