Buyers of the pound-dollar pair tried to storm the 32nd figure at the start of trading on Monday, updating two-month highs. The weakening of the US dollar coincided with the strengthening of the pound sterling, which feels confident against the background of inexplicable optimism about the conclusion of a trade deal between London and Brussels.
EU's chief negotiator, Michel Barnier, returned to Britain on Monday and made very inspiring comments ahead of the next round of talks, allowing the GBP/USD bulls to take new price peaks. Although key issues remain unresolved, there is general confidence in the market that the deal will be completed before the end of this year.
In extreme cases, the parties will extend the transition period for several months. And although there are no actual reasons for optimism, and London categorically rejects the idea of extending the negotiation period, traders persistently, and we can say "blindly" believe in a" happy ending", investing in the pound sterling.
The main driver of GBP/USD growth is the dollar. Biden's almost 100 percent victory in the US presidential election pushes the US dollar down across the market. In one way or another, the greenback is getting cheaper in all major dollar pairs. Interest in anti-risk assets declined, while the dollar was in demand as a protective asset. Nevertheless, the decline in the US dollar is not impulsive. The dollar index is slowly sliding down and even shows corrective pullbacks, reacting to the news flow from the US.
Few doubts Biden's victory including and most importantly Trump's team, whose representatives continue the process of appealing the election results in state district courts. The future state of the dollar will depend on the position of American judges: if they consistently refuse the Republican lawyers to consider claims (there are already similar precedents), the greenback will continue to become cheaper. Otherwise, corrective pullbacks are likely. For example, in the case of the GBP/USD pair, the price may roll back to the base of the 31st figure.
But, in my opinion, the strengthening of the dollar should be treated with skepticism: even if individual courts order to recalculate the postal ballots, Trump will not be able to snatch a victory for himself. All experts surveyed by Bloomberg and Reuters are sure of this. Actually, for this reason, Joe Biden has already been congratulated on his victory by the leaders of the world's leading countries (Germany, France, Japan, Israel, etc.). Therefore, we can conclude that Trump will not be able to deploy the dollar through litigation.
Meanwhile, the situation with Brexit grows more complicated. At the moment, the contentious issues between Britain and the EU have narrowed to three main points: fishing, ensuring a "single game" for companies, and agreeing on ways and mechanisms to resolve any future trade disputes. As European Commissioner for the internal market Thierry Breton noted on Friday, there is a 50-50 chance that London and Brussels will be able to reach an agreement on the terms of the future relationship. In turn, Michel Barnier expressed optimism on Monday about further negotiations. At the same time, he acknowledged that key issues are still not resolved, while the time before the next EU summit (which is scheduled for the second half of November) is now nearing.
And yet, contrary to many alarm signals, the pound is on the defensive, ignoring the pessimistic comments of negotiators and politicians. This can be partly explained by the fact that the parties have repeatedly postponed deadlines and peculiar "red lines" in negotiations. This suggests that neither European nor (especially) British politicians intend to implement a "hard scenario", especially in the context of the coronavirus crisis.
There is general confidence in the market that the deal will either be concluded in full or that unresolved issues (for example, the issue of fishing) will be removed from it, extending negotiations on them. Or the third option – the parties will extend the transition period for 3-6 months, arguing that this forced step is still the same coronavirus. By the way, the victory of Biden (who is of Irish descent) will also have an impact on the negotiation process.
Even before his election, the Democratic leader repeatedly stated that Brexit should not lead to the restoration of the border in Ireland. According to some analysts, the lack of US support will weaken London's position in negotiations with the EU.
Thus, the GBP/USD pair retains the potential for its growth in the medium term, both due to the expected weakening of the dollar and due to the strengthening of the pound. Therefore, the current price decline can be used to open long positions with the first target of 1.3200. The main goal of the upward movement in the medium term is 1.3250.
The technical picture also indicates the potential for further growth of GBP/USD. On the daily chart, the pair is located between the middle and upper lines of the Bollinger Bands indicator, as well as above all the lines of the Ichimoku indicator, which formed a bullish "Parade of lines" signal.
