The pound is betting on Merkel

The progress of negotiations on the creation of a coalition in Germany will become a litmus test for the GBP/USD pair that managed to climb the pedestal among the currencies G10 at the end of 2017. The British pound started the year of the Dog in mixed feelings. On one hand, the replacement of some ministers testifies to Theresa May's confidence in the progress in the negotiations on the divorce with the EU; On the other hand, the minister entered the Cabinet without a portfolio, while there are rumors of the Brexit's secretary David Davis to become an assistant. Both the policy and expectations of the BoE increase in changing the sterling rate in 2018. Therefore, investors should carefully monitor the news.

Unfortunately, macro statistics introduces confusion in the ranks of traders. As a result of the third quarter, labor productivity in the UK increased by 0.9% q / q, which is the best indicator since 2011. This circumstance could potentially accelerate the growth of wages with a gradual slowdown in inflation, which could lead to an increase in real incomes of the population. Nevertheless, the productivity did not grow due to the increase in production volumes, rather because of the reduction of the worked time. This indicates the hidden problems of the labor market. The consumer spending index from VISA declined by 0.37% year-on-year in 2017 and 1% y/y in December. At the same time, the decrease in consumer activity in the area of lending at the highest rate since mid-2015 overshadows the overall picture.

Back in late December, the IMF said that living in such conditions as if Brexit has already become a reality. Such rhetoric gave grounds for rumors that the worst for GDP and the pound is already behind, allowing the latter to strengthen by 10% against the US dollar in the last year. Nevertheless, the mood among 112 management companies, which account for almost 20% of the capitalization of the entire stock market of the country, has worsened. They believe that Brexit's influence on the economy is only beginning to take effect.

Estimation of economic risks by managing British companies


Source: Bloomberg.

There is no consensus on the prospects for the pound among the experts of Reuters. Their consensus forecast suggests that the GBP / USD and EUR / GBP pairs will close 2018 at 1.36 and 0.89. According to Societe Generale, sterling can finish the current year both at $ 1.5 and close to $ 1.2. The first option will take effect if Britain decides to hold a new referendum and retain its membership in the EU. The second is the possibility for a combination of the failure of the negotiations on Brexit, the weak economy and a strong dollar. The probability of the GBP/USD pair growing to 1.5 banks is estimated at 15% with chances of the pair falling to 1.2 - in 5%.

In the week of January 12, the negotiating process between the CDU and the Social Democrats in Germany regarding the creation of a coalition will be of fundamental importance to the pound. Angela Merkel is seen as a person contributing to a soft Brexit, hence, her failure will increase the risk of a GBP/USD pair's decline.

In a technical analysis, the fall in the quotes of the analyzed pair below the support level at 1.3505 will create the prerequisites for the development of correction towards the upper boundary of the previous consolidation range at 1.304-1.332.

GBP / USD pair, daily chart


The material has been provided by InstaForex Company -