The pound plays the role of a pendulum

The British pound swept the roller coaster, first taking off significantly above an important psychological value of $1.4 mark against the backdrop of the Bank of England's "hawkish" comments followed by a collapse below $1.39 due to the growing risks of the tough Brexit negotiations. According to the EU's chief negotiator, Michel Barnier, if the differences between Brussels and London continue, there can be no question of a transition period. The attention of investors has again shifted to negotiations, which makes the sterling perform the functions of a pendulum.

"Bulls" of the GBP/USD pair easily fought the resistance of their opponents, who bet on a strong dollar in the conditions of rising volatility and the collapse of the S&P 500, after the results of the February meeting of the Bank of England became known. The regulator noted that the tightening of monetary policy could go faster than currently expected markets. As a result, fixed-term contracts increased the chances of raising the repo rate in May from 38% to 70%, and the pound soared to $ 1.4065. BoE is easy to understand since the easing of inflation from 3% to 2% requires either aggressive monetary restriction or revaluation of sterling. The optimism of the Committee on Monetary Policy and its "hawkish" rhetoric can lead to the latter.

At the same time, finding unemployment in the lowest rate for the last 42 years at 4.3% and the positive forecasts of employers expecting the acceleration of average salaries from 2.6% to 3.1% in 2018, allow the Central Bank to raise the forecast for GDP for the current year from 1.7% to 1.8%. Indeed, if the gap between consumer prices and wages again becomes negative, Britain can hope not only for strong external demand but also for domestic resources, including the growth of the purchasing power of the population.

Dynamics of average wages and inflation in Britain


Source: Trading Economics.

Alas, but the regulator's desire to accelerate the sterling is not enough. Firstly, the monetary policy normalization factor is not the only driver of changes in the GBP/USD pair. There are still concepts, such as the strength of the dollar and capital flows. Secondly, political risks continue to hang over the pound with a sword of Damocles.

Although the reports argue that the decision must be reached by the end of March. In fact, negotiations can be progressed on. If it does not appear on the horizon, the divorce will be held on the terms of the WTO. At the same time, the longer the uncertainty persists, the greater the risk of capital flight from the financial markets of the Foggy Albion, which is a bearish factor for the GBP / USD pair. Let's not forget about the macro statistics. Investors will be focused on the release of data on inflation and retail sales in the week of February 16.

Technically, it targets 161.8% on the AB = CD pattern, which can give a breather to the bulls of GBP/USD pair. A breakout of the support level at 1.3755 will strengthen the risks of the development of correction towards the area of 1.3605 and the lower limit of the upward trading channel.

GBP / USD, daily chart


The material has been provided by InstaForex Company -