Premature and almost unreasonable optimism regarding the outcome of preliminary negotiations between Boris Johnson and the leadership of the European Union quickly weathered: the pound could not gain a foothold in the 26th figure against the dollar and expectedly fell 100 points. Traders concluded that behind the beautiful mask of inspirational phrases lies the uncertainty and risk of a harsh scenario.
By and large, many experts came to this conclusion immediately after the publication of the statement of the European side. The head of the European Commission once again expressed her desire to conclude a deal, voicing her intention to intensify the dialogue. At the same time, the parties made it clear that key controversial issues remained hanging in the air - no fundamentally important and strategically significant decisions were made at the meeting. In other words, there is no trace of a breakthrough in the negotiations, which means that the prospects for a "hard divorce" between London and Brussels still look quite real. Moreover, today the head of the European Commission was no longer so optimistic - according to Ursula von der Leyen, the parties did not even reach the middle way in the process of reaching agreements. She also noted that at the moment no one can confidently predict at what stage the negotiations will be at the end of this year. Against the background of such rhetoric, Johnson's intentions announced yesterday to conclude a deal before the end of July look at least strange.
Therefore, the pound almost immediately after the "mini-summit" interrupted its growth and froze in anticipation of the next news item, periodically falling to the bottom of the 25th figure. The next news feed will not have to wait long because tomorrow, that is, on Thursday, the Briton will react to the results of the June meeting of the BoE. With a high degree of probability, we can assume that the GBP/USD pair will demonstrate increased volatility tomorrow, and this volatility may also be in favor of the British currency.
According to the general opinion of the market, the June meeting of the English regulator will be accompanied by extremely soft, pessimistic rhetoric. According to the most dovish scenarios, the BoE will announce tomorrow (or it will be possible) to reduce the interest rate to zero. Also, BoE Governor Andrew Bailey can again raise the topic of negative rates, although his colleagues on the Committee had previously spoken out about this, not supporting such steps.
Of course, the English regulator has every reason to soften monetary policy. According to the latest data, the British economy fell by a record 20.4% - this is the largest drop in the country's history. Large losses were recorded in imports and exports, while the airline market crashed by 92%. Due to the closure of hotels, bars and restaurants, the services market declined by 88%. Against the backdrop of the coronavirus crisis, almost all areas of the country's economy suffered, with almost no exceptions. The industrial production indicator also showed an anti-record (-20.3%), and the production volume of the processing industry decreased by almost 30% in annual terms. Data on unemployment and inflation only added fuel to the fire - the number of applications for unemployment benefits jumped to 528,000. Salary data also came out in the red zone, both in annual and monthly terms. Including premiums, this indicator slowed down to 1%, excluding bonuses - up to 1.7% (for comparison, in March this indicator was at the level of 2.7%). Core inflation slowed down as well, reaching 1.2% (for example, in February it reached 1.8%). The general consumer price index came out at a forecasted level, but this is not easier, since on an annualized basis the indicator has slowed down to 0.5% (in monthly terms the indicator has reached zero).
In other words, such a parade of anti-records allows the BoE to voice extremely dovish rhetoric tomorrow. There is one nuance: the British data is published with a significant slowdown: in mid-June we found out April data that reflected the peak of the coronavirus crisis. These figures a priori could not be in the green zone, given the unprecedented spring events. Therefore, the English regulator can completely turn a blind eye to outdated statistics, expressing hope for a V-shaped (or at least U-shaped) economic recovery in the second half of the year. In this scenario, the BoE will expand the QE program by 100-150 billion pounds (this fact is already taken into account in prices), but will not touch on the topic of reducing the interest rate. If at the same time, Bailey voices optimistic rhetoric regarding the prospects of the British economy in the second half of the year, then the pound will shoot up in the entire market, including paired with the dollar.
Thus, the British currency is at a crossroads: paired with the greenback, it will either test the resistance level of 1.2850 (the upper line of the Bollinger Bands indicator on the daily chart) or fall to the bottom of the 23rd figure, i.e. to the lower border of the Kumo cloud on that same timeframe. The second scenario will be implemented if the regulator allows a further rate cut.
Given such a fork, it is advisable to make trading decisions on the pair following the results of tomorrow's meeting of the central bank. In my opinion, the market is too confident that the English regulator will take a dovish position. Interest in the pound will increase again if these hopes are not met (or are not fully met).
The material has been provided by InstaForex Company - www.instaforex.com