GBP/USD. Andrew Bailey raised the British currency's immunity

The US dollar continues to be under pressure from a negative fundamental background, but not all dollar pairs react to this fact in the same way. For example, USD/CAD is growing, despite the greenback's weak position - the loonie fell after the Bank of Canada cut the rate by 50 basis points. The yen also expects action from the Bank of Japan. The European currency is still in a defensive defense: the rhetoric of the ECB representatives is controversial, and so far indicates the preservation of a wait-and-see attitude.

But the pound in recent days has clearly dominated the US currency. After an impulsive decline to multi-month lows (that is, to the 1.2725 annual low), the GBP/USD pair turned 180 degrees and has been growing for the third day, approaching the boundaries of the 29th figure. Such price dynamics are caused not only by the dollar's vulnerability: the pound reacted positively to the statement of Mark Carney's successor Andrew Bailey, although he actually announced a reduction in interest rates. But buyers of GBP/USD also found positive aspects in the current situation: in fact, Bailey outlined the boundaries of possible actions by the central bank, and this fact made it possible for the bulls to seize the pair's initiative.


So, the actual head of the Bank of England (he will take up his duties this month) announced that the central bank could reduce the interest rate "approximately to 0.1%". The news in itself is negative for the British currency, but Bailey's subsequent remarks offset the initial reaction. Firstly, he said that the regulator had virtually no space left for political maneuvers, so one could not count on an aggressive reaction from the central bank.

Secondly, the issue of reducing rates is still under discussion, and there is no final decision on it yet. According to Bailey, regulator members need more information about the negative effects of coronavirus before they make an appropriate decision on monetary policy. Thirdly, the option of reducing to the negative area was virtually ruled out - in his opinion, negative interest rates will have a negative impact on the UK banking sector. Well, and fourthly, he said that the government needs to increase the role of fiscal policy. Similar rhetoric is voiced by ECB representatives. By the way, the European Central Bank is also limited in its maneuvers, especially given the ambiguous attitude of some members of the European regulator to the current ultra-soft monetary policy. Largely due to this factor, the euro is afloat, despite the active spread of coronavirus in Europe.

In other words, Bailey outlined the boundaries of possible action on the part of the English regulator, and this fact supported the pound. It is also worth considering that even under the current conditions, the central bank doubts the advisability of easing monetary policy. Based on this fact, it can be assumed that when the epidemic comes to naught (and sooner or later it will happen), the BoE will have to maintain at least a wait-and-see attitude, and perhaps it will consider raising the rate.

And here it is worth recalling that recently published figures of macroeconomic statistics for January allow the BoE to "hold the defense." In particular, all inflation indicators in January came out better than expected. In annual terms, the general consumer price index jumped to 1.8% - there has not been a similar result since last summer. Core inflation also came out in the green zone, recovering to 1.6%. In addition, the retail price index rose to six-month highs (on an annualized basis), and the producer purchase price index instead of declining to -0.1% unexpectedly increased to 2.1%. Similarly, the producer price index rose: +0.3% m/m, 1.1% y/y.

Published data on the labor market also supported the pound (excluding salaries): the unemployment rate remained at a record low 3.8%, while the growth rate of the number of applications for unemployment benefits reached 5 thousand, then most experts expected it to the level of 20 thousand. We were also pleased with retail sales. The consumer activity of the British has increased, despite the panic about the spread of coronavirus. The total retail trade (including fuel costs) grew in January by 0.9% in monthly terms and by 0.8% in annual terms (both indicators came out better than expected). Excluding fuel costs, the indicator showed a more significant increase: firstly, it left the negative area and grew to around 1.6% (instead of the forecasted level of 0.8%) in monthly terms and up to 1.2% year on year, instead of the expected increase to 0.5%.


Thus, the growth of key macroeconomic indicators and the strategically important speech by Bailey contribute to the pound's growth. And until the Brexit theme reappears on the market (negotiations are still in silent mode), the pound will take advantage of the dollar's vulnerability. According to some experts, the Federal Reserve will not limit itself to a 50-point cut: before the summer, the regulator can again lower the rate. In particular, the head of the Federal Reserve Bank of St. Louis James Bullard yesterday did not rule out a similar scenario - according to him, the rate cut at the March meeting "may not be necessary."

From a technical point of view, the first target of the upward movement is the 1.2920 mark (the resistance level that corresponds to the midline of the Bollinger Bands indicator on the daily chart). When pinned above this target, the GBP/USD pair will surely return to the region of the 30th figure.

The material has been provided by InstaForex Company -