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20.02.2020 12:55 AM
GBP/USD. Brexit vs inflation

The pound continues to be under pressure: despite good data on the growth of British inflation, the GBP/USD pair showed only a small price spurt, after which the pair plunged to the middle of the 29th figure. To the disappointment of the bulls of the pair, the news background regarding the prospects of the negotiation process between London and Brussels was not on the side of the British currency. And as you know, the Brexit issue is a priority for the pair - even American events are often ignored by the market when it comes to the "divorce proceedings". And although Brexit itself is already left behind, now the parties are trying to crystallize the rules for further relations. Harsh statements and comments (both from Brussels and London) offset any other fundamental factors.

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It is noteworthy that the main reports that were published this week did not significantly pull down the pound. On the contrary, the labor market showed good dynamics (though salaries did not reach the forecasted values), and today's inflation indicators - as a selection - they all came out in the green zone. If not for the Brexit factor, the pound paired with the dollar would probably have already tested 31 figures, opening up new price horizons for themselves. After all, current data suggest that the Bank of England will continue to maintain a wait-and-see attitude, despite calls by some members of the regulator to lower their interest rates. But the political events of recent days have mixed all the cards. GBP/USD traders again bogged down in a swamp of uncertainty amid the ultimatum statements of British and European politicians.

In particular, Michel Barnier, the EU's chief negotiator, said today that Britain would not be able to get the same trade deal with the European Union as Canada. He said that Brussels is ready to voice a proposal to London, suggesting an "ambitious partnership", but the British proposed the Johnson team's scenario should be excluded from the list of probable ones. Barnet made this statement after his colleague, the British negotiator David Frost, called on Europeans to build relations that would "be built on a free trade scheme with Canada."

Simply put, he proposed the so-called "Canadian option," according to which London enters into a deal with Brussels similar to the Comprehensive Free Trade Area Agreement (SETA) between the EU and Canada. This option allows for almost duty-free trading, with the exception of a number of goods and the service market. As an alternative, the British propose to go for the "Australian version". In this case, the parties can choose which sectors of the economy they can agree on, while all other areas will be regulated by the rules of the World Trade Organization.

All the options voiced have their flaws - primarily from the point of view of the interests of the EU. According to Barnier, the trade deal between Britain and the EU will include, in particular, regulation of the fishing industry and other specific conditions for relations, given the territorial and economic proximity. Therefore, the future relations of Great Britain and the EU, according to Barnier, cannot be compared with the relations of the European Union with Canada or Australia. In addition, Brussels continues to insist that London accept the jurisdiction of the EU Court in possible trade disputes. Johnson predictably opposes this proposition.

By the way, the agreement on trade and economic cooperation between the EU and Canada was concluded in 2016 after seven years of negotiations (!). Similar negotiations between Brussels and Australia on a free trade deal began in the year before last and still have not ended. But negotiations between the UK and the EU will officially begin only in March and should end in December. Given such a short time and all the previous statements by politicians, one can imagine how complex and nervous they will be.

Actually, the pound is losing points against the background of such prospects. The good data on the growth of British inflation could not convince traders to strengthen the bullish positions in the pair. Although all inflation indicators today came out better than expected. For example, in annual terms, the general consumer price index jumped immediately to 1.8% - there has not been a similar result since last summer. Core inflation also exited in the green zone, recovering to 1.6%. In addition, the retail price index rose to six-month highs (on an annualized basis), and the producer purchase price index, instead of dropping to -0.1%, unexpectedly increased to 2.1%. Similarly, the producer price index rose.

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But all the successes "on the inflation front" today were ignored by traders of the GBP/USD pair - market participants focused on the Brexit topic, thereby increasing pressure on the pound. At the moment, the pair is heading to the bottom of the 29th figure, while the closest support level is located slightly lower - at around 1.2860 (the lower line of the Bollinger Bands indicator on the daily chart). It is worth noting that significant news of a positive nature regarding the prospects of the negotiation process can turn the pair 180 degrees in the blink of an eye. But, apparently, such a scenario seems unlikely so far - at least in the short term. Therefore, in the near future, the price may get stuck in the range of 28-29 figures in anticipation of the next information drivers.

Irina Manzenko,
Analytical expert of InstaForex
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