The weakness of the US dollar, moderately optimistic data on industrial production in Britain and investors' awareness that the Brexit negative is already largely embedded in the pound's prices allowed the GBP/USD pair to rise above the psychologically significant 1.32 mark. Sterling recorded its best weekly performance against the US dollar since June, while the acceleration of inflation and the stability of the labor market of Great Britain are able to drive its rate even higher. In this scenario, the probability of raising the repo rate will increase, which is a strong argument in favor of buyers of the British currency.
In July, industrial production increased by 0.2% m/m after an increase of 0.5% m m in the previous month. The manufacturing industry grew by 0.5%, which reduced fears about the sluggish GDP dynamics in the third quarter. In the first half of the year, the economy of the U.K. has become the worst among the G10 currency issuing countries. However, from the middle of August., the economic surprises index managed to reverse the downward trend, which allowed the bulls for GBP/USD to organize a large-scale assault in order to restore the upward trend.
Dynamics of the index of economic surprises in Britain
Source: Bloomberg.
By the 15th of September, the pound is to be tested by a busy economic calendar, including releases of inflation data, the labor market, retail sales, and a meeting of the Bank of England. At the same time, the acceleration of consumer prices to 2.8% will increase the likelihood of the BoE tightening the monetary policy in the future. In September, the regulator is unlikely to decide to increase rates. It should be noted that the tension in the British society due to the decline in real wages is growing: nurses organize strikes, and at any time they are ready to support workers of other professions. The main reason is the lagging dynamics of the average wage for inflation.
Dynamics of average wages and inflation in Britain
Source: Bloomberg.
However, without a weak US dollar, the bulls for GBP/USD could hardly have expected such successes. "Dovish" comments urging the Fed to be patience by Lael Brainard and allegations that the U.S. Central Bank is at fault for the deteriorating labor market condition by Neel Kashkari reduced the probability of an increase in the rate of federal funds to 37%. And yet, a month ago, the chances were more than 50%, and in June they reached 61%. The market does not believe in triviality of the possibility of tightening monetary policy and actively sells the dollar.
Its supporter still have hopes that large-scale auctions of the Ministry of Finance in the fourth quarter will reduce liquidity in the market, provoke a correction of stock indices and inflate demand for the American currency. But the low interest in securities and the slowdown in the US economy under the influence of Hurricane Harvey can make adjustments to the bulls' plans for the dollar.
Technically, if the buyers of GBP/USD manage to gain a foothold above the level of 1.321 (88.6% of the wave of the CD model 5-0), then the risks of continuing the upward push in the direction of the target by 127.2% on the AB=CD pattern will increase sharply.
GBP/USD, daily chart
