The British currency paired with the dollar showed increased volatility last week. After unsuccessful attempts to conquer the 30th figure, the GBP/USD pair collapsed to many-month lows, testing the 27th figure. The last time the price was at such lows in October last year, when British and European politicians once again frightened the financial world with a "hard" Brexit. To date, the Brexit theme is still in trend, but now traders are prone to other "horror stories."
The magnitude of the possible consequences of the coronavirus epidemic made nervous not only the participants in the foreign exchange market: for example, the MSCI World index (a stock index reflecting the situation on the global stock market) showed a weekly decline of 9.4%, a similar trend was observed except in the fall of 2008. Japan's Topix index fell by 3.7%, the Australian S&P/ASX 200 and South Korean Kospi - by 3.3%. US markets finished trading on Friday with the worst result in ten years. In particular, the S&P 500 lost about 9% for four days of the week, and fell another 4.42% on Friday. The Dow Jones Industrial Average and Nasdaq Composite Index experienced a similar downward turn.
The dollar index slipped to 97 points against this background, thereby reflecting sales of the US currency throughout the market (for comparison: at the end of last week, this figure was near the hundredth level). Therefore, the greenback played the role of a "whipping ball" in most currency pairs: the yen strengthened against the dollar by more than 200 points per day, and the European currency still completed the week within the 10th figure. But the pound paired with the dollar behaved somewhat differently. The British currency looked a weaker greenback, while the coronavirus factor only aggravated the position of the GBP/USD bulls. In particular, the current head of the Bank of England Mark Carney (he will leave his post in March) said on Friday that the country is already seeing an economic effect from the epidemic. According to him, the tourism industry, as well as the production sector, will suffer the most. And here it is worth recalling that the UK economy showed zero growth in the fourth quarter of last year compared to the previous three months. Manufacturing output fell 1.1% on a quarterly basis. Obviously, the epidemic will only exacerbate the situation in the first quarter of this year.
It is noteworthy that the comments of Mark Carney came at a time when around 20 confirmed cases of infection in the UK were announced. Moreover, the Ministry of Health has reported the first human-to-human transmission of coronavirus in the country. The market again started talking about the fact that the English regulator could soften monetary policy at the next meeting, although until recently the likelihood of this scenario was quite low - good data on rising inflation, the labor market and the volume of retail sales eliminated the corresponding concerns. Now the issue of rate cuts is again on the agenda.
This combination of news flows put pressure on the British currency. But the main catalyst for pulling down GBP/USD was Brexit.
Let me remind you that last week the EU Council approved the mandate of the European Commission in negotiations on future relations with Britain. The 46-page document will become the basis for the upcoming negotiations within the transition period - the first consultations between the parties will begin on March 2, that is, on Monday. The European mandate reflected Brussels' rather tough stance in the upcoming talks. A common thread is the idea that EU standards should serve as an "unconditional reference point" in any version of a future trade agreement. According to the European Commission, these standards should be applied in the areas of state aid, competition, state, social and labor standards, environmental standards, climate change, relevant tax issues "and other regulatory measures and practices in these areas". In other words, Europeans initially rejected both the "Canadian" and the "Australian version of the deal."
A few days later, London announced its mandate for trade negotiations with the European Union. It turned out to be no less rigid and quite ultimatum. First, the British continue to insist that the trade deal with the EU should be similar to the agreement with Canada. Secondly, the Johnson team ruled out the possibility of prolonging the transition period - although almost all experts unanimously say that the parties will not have time to agree on all the nuances of future relationships in such a short period. For example, the negotiations of Brussels with Ottawa lasted no less than seven years. But London stands its ground. Moreover, an intermediate "deadline" was determined on Downing Street. If by June it becomes clear that the parties will not be able to conclude a trade agreement until December, then Britain will enter the regime of preparation for exit without a deal. According to Johnson, by the beginning of the summer, negotiators should agree at least on the general features of future relations. The British also once again emphasized that they would not follow the rules and regulations of the European Union.
Thus, the dispositions of the parties indicate that in the coming months we will have a "big battle" between the negotiators. The British mandate runs counter to almost everyone with the requirements of Brussels, and in categorical form.
It is likely that during the many months of negotiations, the parties will nevertheless make certain compromises - as was the case during last year's dialogue. But initially, negotiators will almost certainly show an extremely tough and peremptory line of behavior, thereby raising rates and expressing readiness for any outcome of the negotiations. Therefore, the results of the first meetings of the negotiating groups can exert strong pressure on the British currency. Despite the price retreat to the close of the trading week, the GBP/USD pair may continue the downward movement next week, especially if the first dialogue between the negotiators ends on a minor note. The immediate goal of the downward movement is the support level 1.2670 - this is the lower line of the Bollinger Bands indicator, which coincides with the upper boundary of the Kumo cloud on the weekly chart.
The material has been provided by InstaForex Company - www.instaforex.com