Pound plays on the weakness of the enemy

The British pound, which soared to 7-week highs against the US dollar, deservedly claims to be the most interesting currency of the week by January 18. Not only is the economic calendar full of important indicators in the face of inflation and retail sales, but the parliament is also going to vote on the draft agreement with the EU proposed by Theresa May. This event was previously regarded as a pendulum of a kind, capable of swinging the sterling to either $ 1.1 or $ 1.45. Times change. Now, it becomes clear that a single verdict of legislators is not enough to provoke serious fluctuations in GBP / USD.

From a fundamental point of view, the slowdown of the economy of Foggy Albion from 0.7% in the summer to 0.3% q / q in the fall, paired with a slowdown in consumer price growth and sluggish business activity of special dividends to the pound, should not bring. On the other hand, due to the unfavorable political landscape, it lost more than 5% of its value to the US dollar in 2017, that is, it can be considered an undervalued currency. Paired with unemployment near the minimum level since the 1970s and the accelerated growth of average wages, this circumstance allows us to justify the purchase of GBP / USD. Clarification of the political situation can push up the indexes of purchasing managers and draw a picture of a bright future for Britain.

UK GDP Dynamics

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Dynamics of British Inflation

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The problem is when exactly the fog of uncertainty over the United Kingdom will dissipate. Currently, sterling is gaining whists against the US dollar due to hopes for the extension of Article 50 of the European Union Code and because of the weakness of its main competitor. Rumors that the government is considering this issue are growing by leaps and bounds. In this scenario, the likelihood of a repeated referendum and preservation of EU membership increases, which is a bullish factor for GBP / USD.

The vulnerability of the US currency is due to growing investor confidence at the end of the Fed's monetary policy normalization cycle. The derivatives market gives only a 12% chance that the federal funds rate in 2019 will be raised from 2.5% to 2.75%. Many FOMC members, including such "hawks" like Eric Rosengren and Charles Evans, are not averse to sit and see how the economy will develop. Jerome Powell speaks about the Central Bank's flexibility in making decisions in connection with a slowly growing inflation. Taking into account the fact that consumer prices for the first time since August have fallen below the target of 2%, it can be assumed that at least until June one should not rely on the monetary restriction of the Fed. But over the States hangs the sword of Damocles slowdown in GDP due to the temporary suspension of the government. Legislative power has been out of business for the longest time in history, and there is no end in sight.

Technically, the breakthrough of resistance at 1.2825 and the activation of the Shark pattern allows the "bulls" at GBP / USD to count on the continuation of the rally in the direction of its target by 113%. It corresponds to the mark of 1.327. The implementation of the "Wolfe Waves" model is also in favor of the northern march.

GBP / USD, the daily graph

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The material has been provided by InstaForex Company - www.instaforex.com