The pound against the dollar follows the general trends in the market, dominating the US currency. Over the past month, a pair of gbp / usd has lost more than 600 points, dropping from a price peak in May of 1.3170 to an annual minimum of 1.2558. Therefore, the current correctional growth looks quite logical – both from a fundamental and a technical point of view. For the first time in a long time, the Briton did “let go” of the Brexit theme and took advantage of the weakness of the American dollar. Rumors of a decline in the Fed’s interest rate put a strong pressure on the yield of the American debt market and on greenbacks, and because of which, the dollar index sank to the founding of the 97th figure.
However, the current situation in the foreign exchange market should be treated with great caution. Traders are now too exposed to emotions, assessing the prospects for the monetary policy of the Fed in general and the dollar in particular. After all, the possible reduction in the interest rate was initially talked to among experts. Analysts and some American politicians, while the members of the Federal Reserve themselves did not voice such intentions. Here, I do not take into account such supporters of the “pigeon” of politics, like Bullard or Kashkari, – they have been advocating for easing monetary conditions since last year. However, the majority of Fed members are still supporters of the wait-and-see attitude, at least at the time of the May meeting of the Federal Reserve. Therefore, in my opinion, the market is too hastening events, laying at current prices.
Of course, the idea that the Fed could lower the rate by the end of the year was not born out of thin air. The behavior of the debt market, the stock market, as well as the continued protectionism of the White House against the background of slowing inflation and other macroeconomic indicators cannot be ignored by the US regulator. However, the current situation so far allows the Fed to maintain a wait-and-see attitude, at least in the context of the coming months. Nevertheless, the market estimates the likelihood of interest rate cuts already at the July meeting at 55% (a week ago, the chances were no more than 18%). Such a rapid escalation of the situation could result in an equally rapid rise in the dollar if Jerome Powell rejects the idea of lowering the rate in the near future. It is worth recalling here that today in the period of the American session, the Fed Chairman will speak in the economic conference at the Federal Reserve Bank of Chicago. And the theme of his speech will be devoted directly to prospects (or rather, strategy) of monetary policy.
The behavioral logic of gbp / usd traders (as well as eur / usd) is now determined by the market postulate “buy on rumors, sell on facts”. But today, the long positions of the pair should be treated with extreme caution: Jerome Powell can either confirm the assumptions of the market, or refute the rumors that have appeared (as has repeatedly happened before). In addition, gbp / usd traders need to be vigilant for another reason. The Brexit theme has a time bomb that will sooner or later remind you of yourself. And judging by indirect signs, this “reminder” will not like the British currency, as well as the bulls of gbp / usd.
Let me remind you that now there is an active (but so far “conspiratorial”) political struggle between the candidates for the post of British prime minister. According to experts, the leader is still odious Boris Johnson, his most likely competitor is Dominic Raab (former negotiator with the EU). Both are fairly tough with respect to the prospects for Brexit, and both admit the likelihood of a chaotic exit of the country from the Alliance. According to them, they are ready for a dialogue with Brussels, but none of them have yet proposed a formula for a compromise that will suit both Europe and the British parliament.
Both Johnson and Raab are not ready to make substantial concessions to the Europeans, while the Europeans themselves refuse in principle to revise the terms of the agreed deal. The situation again comes to a political dead end, from where there are two ways out: either a hard Brexit, or a new delay. The second option would have liked the British currency, but recently the chances for the implementation of this scenario are fading away. Initially, the Germans opposed this option. Bundestag deputies said that Germany would veto another postponement of Brexit if Britain does not hold a general election or a second referendum. Immediately, it should be noted that neither Johnson nor Raab would agree to fulfill this ultimatum.
Another key country of the European Union, France, voiced the same conditions, albeit in a somewhat veiled form. French President Emmanuel Macron recently stated that the deadline set for October 31 is the deadline for implementing Brexit, and he personally is against granting any new deferments. True, at the same time, he voiced a rather important reservation – Macron clarified that Britain should withdraw from the EU on October 31, “unless the people of Great Britain want something else.” This is a fairly transparent hint at the need for a second referendum, the idea of which is being lobbied by both the Labor Party and some conservatives.
But here, it is worth remembering that the candidates for the premiership most likely in Britain are ardent opponents of a repeated referendum. Therefore, harsh statements about this will increase the likelihood of the implementation of the remaining option – hard Brexit.
Thus, Powell and Brexit can quickly deploy a pair to the bottom of the 26th figure, and this nuance must be taken into account at least in the context of the placement of stops. In terms of technology, a pair of gbp / usd has the potential to grow up to the level of 1.2750 (the Bollinger Bands average line on the daily chart). The support level is still the price minimum of the year – 1.2558.
The material has been provided by InstaForex Company – www.instaforex.com