Post-Brexit era and UK vaccination drives fuel GBP / USD rally

KEY POINTS:

  • The GBP / USD pair remains unstoppable and gains ground for the seventh consecutive week.
  • The expectation that the UK will lead the economic recovery in Europe could propel the exchange rate in the coming weeks to the high of 2018.
  • However, from a technical point of view, the overbought signals from the RSI indicator suggest that GBP / USD could carry out a bearish turnaround in the short term.

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The GBP / USD (British pound / US dollar) has had an encouraging start to the year, advancing more than 3% so far this year from 1.3700 to a three-year high beyond 1.4100 . This good performance of the British currency in the first bars of 2021 had been motivated at the beginning by the lower degree of uncertainty about the Brexit front, after the long-awaited trade agreement became a reality before the last Christmas Eve.

More recently, however, the GBP has received another dose of optimism through surprising progress in the UK’s coronavirus vaccination campaigns, which has fueled expectations that the world’s sixth-largest economy will rebound from the pandemic ahead of schedule and with more dynamism. In this context, investors have gradually turned their attention to British assets since the beginning of the year after the uncertainty of Brexit kept them on the sidelines for an extended period of time.

The likelihood that the United Kingdom will lead the economic recovery in Europe, and even that it will be at a similar rate to that of the United States, has led Prime Minister Boris Johnson to launch a “careful but irreversible” plan to end the restrictions by the virus in England. Although the confinement measures in the country would see its end on June 21 at best according to the plan, it is possible that this optimistic scenario has not yet been fully discounted in the price of the British pound.

This means that the GBP / USD pair could maintain the upward path and test its 2018 highs in the coming weeks. At the time of writing, the exchange rate is approaching a key resistance zone around the 1,4200 (R1), defined by the March 2018 highs. If buyers manage to penetrate this ceiling, the path would be practically clear to extend the increases to the 2018 high of 1,4377 (R2).

However, it is important to note that at this time the RSI indicator, both on the daily and weekly charts, is entering the overbought territory. That is, we could be on the verge of a bearish turn in the price after the last rises. Therefore, a temporary correction back to the psychological level of the 1,4000 (S1), where a breakout could result in a more severe correction to the uptrend line drawn from the 2020 low (S2).

WEEKLY CHART – GBP / USD (FEBRUARY 23, 2021)

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Written by Daniel Castaño, Research Team

Follow me on twitter: @DCastanoFX

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