GBP/USD could be overextended at these levels and there are some signs of fatigue

• GBP/USD has moved back to flat after trading higher earlier on Thursday.
• Some of the technical indicators are showing signs of fatigue.

Fundamental backdrop - Brexit, COVID-19 and the BoE

GBP/USD has been on a stellar run against the US dollar recently and today finds itself performing well against the likes of AUD and NZD. Overall in the G6 I would not consider the pound to be immune to some weakness in the future as there are a whole host of potential themes that the market could pick up on. First of all, the latest Brexit talk has been very negative with the UK press reporting that the UK could be willing to leave without a deal. EU's Barnier has also been quoted as saying getting a Brexit deal by the end of the year is "unlikely". Elsewhere, the COVID-19 pandemic is far from over in the UK as the nation has only really just opened up its economy after a long period of lockdown. Gym's and swimming pools are now allowed to reopen and in coffee shops and take-away restaurants masks are also set to become mandatory. This is confusing the public as the gym could be more dangerous (due to heavy breathing) and the public has been able to get take-aways for a while. Lastly, the Bank of England has been talking about negative rates at pretty much every opportunity. It's hard to say if this is a serious consideration but the Federal Reserve have categorically ruled it out but the BoE seem to be keeping it on the table. Balancing this against the issues in the US is key. The bookmaker odds for Trump being reelected as not the best and the COVID-19 pandemic response might be one of the worst in the world. We need to ask ourselves how much of this has been priced in and before the election race really hots up will there be some relief for the dollar at these oversold levels.

GBP/USD 4-hour chart - Hesitation at higher levels

Looking at the 4-hour chart below, the price has now tried to attack 1.28 twice recently only to be foiled at 1.2767, This the aforementioned resistance does break it could lead to a test of the previous high but as of yet, it seems the bears are lying in wait protecting the highs. On the downside, there are two support areas that could confirm this theory. The red line just above 1.2650 and the trendline marked in blue. If either or both are breached to the downside we could see some weakness in the pair over the medium term. Much of this largely depends on the risk environment. As the stock markets rise USD seems to be inversely correlated with their performance. The greenback was used as a safe-haven during some of the worst moments of the pandemic but now the problems seem to be localised to America USD selling seems to be a strong theme. There is now a divergence formation on both the MACD and the Relative Strength Index. This could indicate that some upside momentum is wearing thin and the market could experience some fatigue. Confirmation could be a break of the red support area and a break of the wave high at 1.2767 would probably invalidate the signal.

Additional levels