The last time the pound looked stretched was due to rate hike expectations, but this time Brexit is in the driver’s seat. According to the BBC, deals have been struck in recent days relating to the size of the divorce bill and EU citizen’s rights in the UK. Hopes are also rising for an Irish border deal following comments from Ireland’s foreign minister who suggested a deal was “doable” prior to the upcoming EU summit. As such, the currency is rallying on the belief that a broader Brexit deal (particularly relating to trade) is within reach. Until the risk of a ‘no-deal’ scenario is removed, the pound will stay subdued even with strong growth data and future rate hikes.

While a longer-term rally is in the cards, today’s optimism seems premature as a comprehensive Brexit deal remains on the horizon. Based on recent price action, our trending indicators suggest a bullish trend for the pound both in the short-term and the medium-term. Despite the current trend, the pound is starting to look overdone on a daily chart. This is visually shown below:

Short-term expectations running ahead of reality

Source: TradingView.com / MarketsNow

Once bitten, twice shy?

In mid-September, GBP/USD rose above 1.35 on rate hike hopes. Looking at technical indicators suggested that the pair was overbought. At the time, we argued that the pound was susceptible to a pullback due to the one-and-done nature of the rate hike, Brexit-related uncertainty and technical resistance to further strength. The exchange rate subsequently fell to around 1.3050 in October.

Last week, GBP/USD once again rose above 1.35. Similar to the previous occurrence, the pair again breached overbought conditions based on the Relative Strength Index. This time, we are arguing that the likelihood of a breakthrough remains limited as the two sides remain far apart on the key issue of trade. The issues of technical resistance and limited progress from the ongoing negotiations also lurks in the background.