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08.02.2018 12:34 AM
The Bank of England can send the pound down

Three weeks ago, the Reuters news agency conducted a survey among economists, currency strategists and bankers about the prospects for monetary policy in Britain. The result was rather pessimistic: most experts said that the English regulator will keep the current parameters of monetary policy until at least November, following the Brexit negotiation process.

Among traders, there was a slightly different opinion on this issue. At the moment, the market estimates the probability of a rate hike at the May meeting of 50%, given the continued rise in inflation and record-low unemployment. August rates are higher - about 80%. One way or another, but traders are loosely betting on the next round of interest rate hikes. Mainly, this due to the fact that the likelihood of a "hard" scenario of the country's exit from the EU has dropped to 20% after the successful completion of the first stage of the talks.

Such "self-confidence" of the market can render a disservice to the pound - both literally and figuratively. After the failure of PMI data in manufacturing, construction and services, the British currency fell by several figures against the backdrop of the strengthening of the dollar across the market. Despite such a large-scale price pullback, the nature of this movement was correct, as the pair was above the 38th figure. At the moment, the correction has intensified, but the chances of restoring positions still remain. On the daily chart, the price is on the midline of the Bollinger Bands indicator, and the Kumo cloud of the Ichimoku Kinko Hyo indicator is below the price chart. This arrangement suggests that the pair is at a crossroads, and the corresponding news impulse can provoke either growth or a further decline.

But as I said earlier, the high expectations of the market can play a cruel joke with bulls of GBPUSD. Now the main focus is on the growth of key macroeconomic indicators (CPI and the labor market), while Brexit is now in second place. Although, in my opinion, the negotiation process between Brussels and London has approached its most difficult stage.

The demands voiced by Europeans are initially impossible: this is said in England even by politicians who agree with the European integration course. The rule of law of the EU in the transition period, the lack of voting rights of the British, mandatory contributions to the general budget and a loyal migration policy - all these points are unacceptable for London. On the one hand, it is obvious that Brussels starts the dialogue with the maximum demands, in order to subsequently find any compromise. On the other hand, Theresa May is forced to reckon with the opinion not only of internal opposition among members of the government, but also of the "hawks" in the British parliament, whose members will have to approve the deal. In other words, the participants in the negotiation process start a kind of chess game with deliberately losing positions, and everyone hopes for the opponent's compliance.

The stance of the British premier has also become tougher. Now Britain excludes its participation in the Customs Union with the EU, although not so long ago (during the visit to China) Theresa May admitted of such a possibility. Here it is worth noting that information about Britain's rejection of the CU- so far only rumors. The influential British edition of The Daily Telegraph reported this with reference to unnamed sources in the government. However, these rumors were enough to send the pound to the next high not only paired with the dollar, but also throughout the market. As assured by anonymous sources, London intends to conclude with Brussels such a trade agreement that will allow without any restrictions to trade with other countries.

If this insider information is confirmed in the near future, then the second stage of the negotiation process will be much more difficult than the first. The parties voiced extremely unacceptable conditions to each other, without excluding the possibility of a hard Brexit without concluding any transaction.

In turn, another British newspaper- The Guardian - reported a few days ago that the EU during the transition period could impose sanctions against Britain, limiting access to a single market. Journalists refer to a "legal document" that they have at their disposal. In the list of possible sanctions measures - the introduction of tariffs on goods, the establishment of control at the customs and the abolition of the agreement on the "united sky of Europe", allowing British carriers without any obstacles to fly between Britain and the European continent. At the moment it is not known in which case Brussels will use this leverage of influence, but the very fact of the existence of such a document indicates the complexity of future negotiations.

Against the background of such prospects, the growth of British inflation seems to be a very weak argument for the English regulator in the context of tightening monetary policy. Clearly poor PMI data will also have a negative impact on regulator members, softening the accompanying rhetoric.

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Thus, if tomorrow the Bank of England takes a "defensive" position, emphasizing the uncertainty around Brexit, the pound/dollar pair will continue its downward trend to the main support level of 1.3600, which corresponds to the lower line of the Bollinger Bands indicator on the daily chart.
Irina Manzenko,
Analytical expert of InstaForex
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