The British currency can not determine the direction of its movement. Yesterday, the pair collapsed to local lows, reaching the level of 1.2893, following the next attack on the 30th figure. However, GBP/USD shows corrective growth again during the Asian session on Thursday. The position is due to a contradictory fundamental background: on the one hand, the pound is under pressure from the Brexit issue (especially in anticipation of negotiations on a trade agreement), on the other hand, the fall of the pair is constrained by the weakness of the dollar, which remains vulnerable. The market also discusses the prospects of monetary policy, although this fundamental factor has so far played a secondary role, since it is still a month (March 26) until the next meeting of the Bank of England. As a result, the pair is forced to trade as part of a wide-range 200-point flat, the lower border of which is the middle of the 28th figure, and the upper border is the middle of the 30th price level.
Brexit remains the most sensitive topic for the pound. This week, the EU General Affairs Council approved the mandate of the European Commission in negotiations on future relations with Britain. The 46-page document will become the basis for the upcoming negotiations within the transition period (the first consultations between the parties will begin as early as next Monday). The European delegation will be led by Michel Barnier, who "fought with the British" during the first stage of negotiations.
The 46-page document above put significant pressure on the British currency. It reflects Brussels' quite tough position in the upcoming discussions. The common thread is the idea that EU standards should serve as an "unconditional reference point" in any version of a future trade agreement. According to the European Commission, these standards should be applied in the areas of state aid, competition, state, social and labor standards, environmental standards, climate change, relevant tax issues "and other regulatory measures and practices in these areas".
In other words, Europeans initially rejected the so-called "Canadian version" of the deal (as well as the "Australian scenario"). The first option involves almost duty-free trade, with the exception of a number of goods and the market for services. As an alternative, the British propose to consider the "Australian option" - 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.
Moreover, the European Union initially opposed the above options - and now has outlined its position in the form of an approved document. Brussels is trying to "fasten" Britain to EU standards in regulatory matters and trade rules. In addition, Europeans insist that London accept the jurisdiction of the EU Court in possible trade disputes. Great Britain, in turn, is categorically against such proposals. Given these differences, almost all experts and politicians predict a difficult future for the upcoming talks. As French Foreign Minister Jean-Yves Le Drian put it, the parties will "tear each other apart", seeking to gain an advantage in the negotiations. This week, the currency exchange market received another confirmation of such prospects, so the pound paired with the dollar in one day lost more than 100 points.
In addition, many observers are confident that it will be difficult for Britain to conclude a free trade agreement with the EU by the end of 2020. It is worth recalling that the agreement on trade and economic cooperation between the EU and Canada was concluded in 2016 after seven years of negotiations, but similar negotiations between Brussels and Australia on a free trade agreement started back the year before last and have not yet been completed. The upcoming negotiations with London should be completed in 10 months, in December. Given such a short time and all previous statements by politicians, one can imagine how complex and nervous they will be.
The pound paired with the dollar would not be limited to the 28th figure if it were not for the vulnerability of the American currency. The dollar index resumed a downward movement today amid speculation about the prospects for the monetary policy of the Fed. And although Vice President Richard Clarida reassured markets yesterday (he said he was a proponent of a wait-and-see attitude), the general sentiment of the dollar bulls seems depressed. Judging by the dynamics of the spread of coronavirus throughout the world, this issue will be on the agenda for many months to come - therefore, the probability of lowering the interest rate this spring or summer remains high. Due to such risks, the dollar is not able to rally, despite the growth of key macroeconomic indicators.
Thus, GBP/USD in the medium term will remain within the framework of a wide-range flat: on the one hand, Brexit, on the other hand, the vulnerability of the dollar. The support level is the level of 1.2820. This is the bottom line of the Bollinger Bands indicator on the daily chart, while the resistance level is the price of 1.3030 - the Kijun-sen line at the same time frame.
