It is going to be a relatively quieter week from a macro point of view, allowing investors to ponder over any emerging investing and trading themes. I am of the view that the dollar’s rebound is likely to be short-lived and think the pound could be the star performer in 2021. So, if I had to choose one particular dollar pair to be the most optimistic about in 2021, it would have to be the GBP/USD.
Last week, the dollar rebounded along with bond yields, causing gold and silver to drop sharply, as investors started to wonder about the timing of the first interest rate rise amid the ongoing vaccine roll out.
It looks like the markets have brought forward their expectations for the first rate hike from the Federal Reserve to the second half of 2022. However, this is a reflection of investor optimism about more normal times ahead and so I believe it may be far too early to start worrying about the negative side effects of rate hikes on risk assets. The ongoing situation with the virus and lockdowns means central banks will be in no rush to exit their loose policies and more fiscal support could be on the way under the Biden administration, after the Democrats secured control of the Senate.
For that reason, I believe the dollar’s rebound is likely to be short-lived and the reflationary trade will likely keep a floor under commodity dollars and emerging market currencies, reducing the appeal of haven US dollar.
Pound likely to be star performer in FX
Meanwhile, now that a no-deal Brexit has been avoided, the pound is also likely to be supported on dips. With the UK also being among the first countries to roll out the Covid vaccines, we could see an accelerated rebound in the economy once lockdowns end. This makes the pound appealing in my view and could be the currency to watch out for in 2021 after years of side-ways consolidation amid Brexit uncertainty.
GBP/USD testing key support
After Friday’s selling and some further downside follow-through at the start of today’s session, the GBP/USD has now dropped to test THIS key support area around 1.3480-1.3500:
Source: ThinkMarkets and TradingView.com
As per the chart, this is where the 2019 high converges with prior support and resistance and the 21-day exponential. In my view, it is likely that cable may be able to form a potential low around the current levels. But for confirmation, it may be best to wait for it to do so and print a bullish-looking candle on the daily chart here before looking for potential trading opportunities.
One technical reason why I don’t think the trend has turned bearish on the GBP/USD yet is the fact price is still holding inside the bull channel. But if and when it breaks out of it to the downside, then at that point I will drop my short-term bullish view on this pair.