The pound paired with the dollar experienced a rise and fall last week - rising first to the middle of the 30th figure, a few days later it crashed to around 1.2848, thereby updating the annual low. Nevertheless, the GBP/USD pair completed the five-day trading on a major note, touching the boundaries of the 29th figure. Such price fluctuations are due to completely different fundamental factors - if at the beginning of the week the pound reacted only to "its" circumstances (British macroeconomic statistics, comments of politicians regarding Brexit, etc.), then GBP/USD moved in the wake of the US currency on Friday. The recipe for further growth of the pair is quite simple: silence at the front of the negotiation process amid a general decline in anti-risk sentiment in the foreign exchange market. Under such conditions, the dollar will continue to weaken, while the pound will finally be able to win back the macroeconomic releases of the past week, which were left without the attention of traders.
Let me remind you that last week the British currency was forced to respond to political factors that were associated with the prospects of the negotiation process between London and Brussels. Negotiations themselves will not begin until March, but now there is a fairly tough correspondence battle between politicians. Thus, the chief negotiator from the British side proposed the so-called "Canadian option" to his European colleagues, according to which London enters into a deal with Brussels similar to the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada. This option involves almost duty-free trading, with the exception of a number of goods and the service market. As an alternative, he proposed to consider 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.
The EU's chief negotiator Michelle Barnet threw both options back, saying that the economic relations between Britain and the EU have their own specifics, so the proposed scenarios cannot be "redrawn". He also recalled that London should accept the jurisdiction of the EU Court in possible trade disputes. Johnson naturally reacted negatively to the position of the Europeans.
This is far from the first friction between the parties on the eve of the 10-month negotiation marathon. Prior to this, Brussels promised to support Spain in the matter of territorial claims regarding Gibraltar, while Johnson threatened to completely leave the negotiating table. GBP/USD traders are forced to respond to these statements, while ignoring the most important macroeconomic reports. But it is worth noting here that political factors have a sufficient short-term effect on the pair. While key statistics are waiting in the wings. That is why the reports released last week are in "standby mode". Indeed, by and large, the January figures allow the Bank of England to continue to maintain a wait-and-see attitude.
First, all January inflation indicators came out better than expected. In annual terms, the general consumer price index jumped 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 declining to -0.1% unexpectedly increased to 2.1%. Similarly, the producer price index rose: + 0.3% m/m, 1.1% y/y. Published data on the labor market also supported the pound (excluding salaries): the unemployment rate remained at a record low 3.8%, while the growth rate of the number of applications for unemployment benefits reached five thousand, then most experts expected it to the level of 20 thousand.
We were also pleased with retail sales. The consumer activity of the British has increased, despite the panic about the spread of coronavirus. The total retail trade (including fuel costs) grew in January by 0.9% in monthly terms and by 0.8% in annual terms (both indicators came out better than expected). Excluding fuel costs, the indicator showed a more significant growth: firstly, it left the negative area and rose to 1.6% (instead of the forecasted level of 0.8%) in monthly terms and up to 1.2% year on year, instead of the expected increase to 0.5%.
In other words, almost all macroeconomic reports came out in the green zone last week. Some of them significantly exceeded the forecast values. All this suggests that the BoE is likely to take a wait-and-see attitude at its next meeting (to be held on March 26).
The economic calendar for the GBP/USD pair is practically empty next week: the dollar will respond to the "coronavirus chronicles", and the pound will respond to the news flow regarding the prospects of the negotiation process between London and Brussels. If the anti-risk sentiment fades (for example, if the growth rate of the recoveries exceeds the growth rate of those infected), and the European and British politicians take a break before the official negotiations begin, the pound will have a chance not only to return to the boundaries of the 30th figure, but also confidently step over this resistance level. Unlike the euro, the British currency has weighty arguments for its own growth, which, alas, are often drowned out by loud statements by politicians.
The material has been provided by InstaForex Company - www.instaforex.com