Sterling fans will have to wait before the price reaches $1.35

Markets can punish for overconfidence. Bulls, having bet on GBP/USD rise as high as 1.34, discouraged a series of mixed macroeconomic data on the U.K., after another failure in Brexit talks and controversial comments by Bank of England officials. The chief economist Andy Haldane called the boost in average earnings a “new dawn”, but the BoE deputy governor Jon Cunliffe warned on “false dawn”. The wages growth boosted up to 3.1% Y-o-Y in the June-August period seems to be the only positive news in the huge lot of statistics. Disappointing statistics on the U.K. inflation rate and retail sales returned the expected increase in the interest rate in November 2019.

According to Cunliffe, although the currency exchange rate is not the focus of the central bank, it still has a direct influence on the inflation rate. I must admit he is right. The U.K inflation rate is up at 3% after a strong drop of trade-weighted sterling’s value amid Brexit. However, it was followed by a decline in consumer price index also because of GBPUSD rally. With this respect, a lower CPI at 2.4% in September, well corresponds to the BoE idea about gradual approaching the U.K. inflation rate its 2% target. Therefore, the regulator can do nothing through the second half of 2019.

Investors are still focused on political risks. Following a series of positive comments in early October, the GBP positions were shaken by the information that Theresa May had forced the Brexit secretary Dominic Raab to announce to the chief EU negotiator that the British Prime Minister wouldn’t sign the deal. After all, investors hardly believed that the deal would be reached at the EU summit in October. A drop in the monthly implied sterling’s volatility in October is further evidence. The three-month index, on the contrary, is climbing up; it indicates that investors still believe in the positive scenario outcomes in November-December period.

GBP three-month volatility

Source: Bloomberg

Market seems to be aware of its error about soon GBP/USD surge to 1.35 and is back at the initial positions again. The pound trend is getting less likely to reverse, which signals stronger interest in hedging against the risks of its deeper drawdown, in case the Brexit deal is not reached.

GBP/USD bulls’ problems also result from the stronger U.S. dollar, which up after the release of minutes of FOMC meeting in September. The Fed is willing to turn the monetary policy mildly restrictive for a while and raise the interest rate higher than its long-term forecast. It will support the greenback; however the central bank’s meeting had occurred before Donald Trump started criticizing it so much, and the news influence on the financial market is getting a little weaker. But for the political factors, the middle- and long-term GBP prospects look quite optimistic; however, bulls have to storm the resistance at $1.3235 to continue the rally.

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Price chart of GBPUSD in real time mode

British Pound: New Dawn Turns Into False Dawn

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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