The British pound can not find solid ground in the political swamp. Brussels is ready to extend the transition period after March 2019, but the Conservative party resists. Theresa May is considering waiving her claims on the Irish border, but may therefore receive a vote of no confidence. Internal contradictions are so strong that the sterling is not able to take advantage of the statement of the chief negotiator of the EU Michel Barnier, who said that the likelihood of a deal is at 90%. Even if the British prime minister declares 95% in her speech to Parliament in the middle of the week by October 26, the remaining 5% will keep the "bulls" on the GBP/USD pair in the trenches.
If earlier the pound was supported by macroeconomic data, following the release of data on inflation and retail sales, it lost it. Consumer prices slowed from 2.7% to 2.4% yoy in September, allowing the Bank of England to sit idly by. At the beginning of the year, the figure reached 3%, which led to an increase in the REPO rate. If inflation is moving towards the target, what is the point of tightening monetary policy and cutting off the oxygen to the economy? The latter, in turn, seems to be losing steam. This is evidenced by the decline in the growth rate of retail trade from 3.6% to 3% in September. Despite the acceleration of the average wage, consumers are in no hurry to carry money to the shops. Bad news for GDP and sterling.
Mixed macroeconomic data and a viscous political landscape increase the volatility of the pound, which adversely affects the demand of non-residents for British assets. But the UK needs to finance the negative balance of foreign trade, and the inflow of capital of an investment nature is of key importance in this process.
The dynamics of the volatility of the pound
Not the last role in reducing the GBP/USD quotes is played by high demand for the US dollar. Judging by the minutes of the September FOMC meeting, the Federal Reserve is not averse to raising the Federal funds rate above the long-term average, that is, for a while, in order to make monetary policy moderately tight. This is facilitated by a strong labor market and expectations of US GDP growth of 3.4% q/q in the third quarter. It may not be as high as the figure in April-June, but in general it is very decent. The American economy compares favorably with its competitors, which is a strong argument in favor of buying the US dollar. Moreover, according to more than 500 Reuters experts, 18 of the 44 largest countries in 2019 will slow down, 23 will remain at the same level, and 70% of the countries in the sample has already reached its ceiling. The dollar has no serious opponents, which restrains the offensive fervor of "bulls" on the GBP/USD.
Technically, much will depend on the test of diagonal support in the form of the lower border of the downward trading channel. The breakthrough will increase the risks of activating the "Bat" pattern with a target of 88.6%. On the contrary, the retreat will return the "bulls" hope for the implementation of the AB=CD pattern.
GBP/USD daily chart
