GBP/USD - Bear flag, yield diff. at key level, eyes Brexit transition terms

• GBP/USD 4+hour chart shows bear flag pattern.
• 10-year US-UK yield spread is on the rise, flirts with key falling trend line hurdle.
• EU eyes tough transition terms.

Despite the sharp recovery from the low of 1.3109 yesterday, the GBP/USD traded in the sideways manner around 1.3170 in Asia.

The 4-hour chart shows bear flag pattern. Currently, the flag resistance/support levels are 1.3206 and 1.3124. A downside break of the flag pattern would mean the continuation of the sell-off from the high of 1.3321 (Nov. 1 high).

Whether the spot sees a bullish/bearish breakdown of the flag pattern depends to a large extent on the 10-year bond yield differential.

Yield differential

Currently, the 10Y US-UK yield spread stands at 107.8 basis points. An upside break of the falling trend line could yield a downside move in the GBP/USD pair and vice versa.

EU eyes tough Brexit transition terms - Reuters News

The EU officials told Reuters that "the EU diplomats will start sketching out a Brexit transition offer on Wednesday that would probably let Britain stay in the single market for about two years after it leaves the bloc in March 2019."

The officials added, "there will be one or two more meetings of EU envoys before they expect to agree what they might offer Britain in terms of a transition period".

Pound could gain altitude if both parties reach the transitional deal "immediately". The longer it takes to reach the transition deal, the more the uncertainty for the UK businesses, thus the GBP could come under pressure.

GBP/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik writes - " The short-term picture is marginally positive, as despite technical indicators in the 4 hours chart turned higher within positive territory, they still stand below previous highs. In the same chart, the 20 SMA is slowly losing bearish strength below the current level, now converging with the 23.6% retracement of the latest decline around 1.3100, a support area for this Wednesday. A recovery above the daily high could see the pair extending its upward movement to 1.3220, where selling interest will likely contain the advance."

Support levels: 1.3125 1.3085 1.3040

Resistance levels: 1.3165 1.3200 1.32545