The GBP/USD bulls took advantage of the weakness of their opponents and the positive statistics in Britain and launched a counterattack

Strong statistics on business activity in Britain, the optimism of the Bank of England, the decline in political risks and the weakening of the US dollar after the release of data on the US labor market for June allowed the GBP/USD bulls to take the resistance at 1,323 by storm and continue the journey north. The catalyst for the strengthening of the sterling was the resignation of Brexit's secretary David Davis and his assistant Steve Baker after Teresa May presented her plan for the divorce of the Foggy Albion and the EU. The market considered the aggressively inclined officials leaving their positions as a signal about the growth of the probability of a soft Brexit and began actively buying the pound.

The government believes that it managed to eliminate the main stumbling block with Brussels - the issue of the Irish border. London will seek a single market with the European Union and makes concessions on a number of key positions. In general, the presented plan is very similar to the current relations between Britain and the EU, including close customs ties. The Foggy Albion seems to be ready to leave Europe, but remains part of Europe. Support for the GBP/USD bulls was provided not only by the content of the document presented by Theresa May, but also by the emergence of some certainty. Before, the market did not know what the government would come up with, which made it stay away from sterling. According to Societe Generale, the resignation of hard Brexit advocating ministers will help strengthen the pound to $1.34.

Certainty unties the hands of the Bank of England, which can concentrate its attention on macroeconomic statistics. However, better-than-expected data on business activity for June increase the likelihood of an increase in repo rate in August. The futures market estimates it at 80%. Moreover, Mark Carney believes that the BoE will have enough information to make a decision on the continuation of the cycle of monetary restriction. Britain follows the Canadian path and moves to monthly releases for GDP, while the central bank itself calculates the figures, and judging by the confidence of its head, it turns out he does it well.

Dynamics of the probability of the repo rate raise

Source: Bloomberg. 

The GBP/USD bulls would hardly be able to boast their success if not for the weakness of the US dollar. Greenback got a slap in the face from the US labor market. The rise in unemployment to 4% and the sluggish dynamics of average wages became a signal for consolidating profit on long positions in the USD index. At the same time, the curtailment of the European QE is able to support the rival currencies of the dollar, including the pound. According to the research by Oxford Economics, during the implementation of the ECB quantitative easing program, due to cheap liquidity, European investors invested about $500 billion in US debt obligations. Completion of the era of cheap money will lead to their movement in the opposite direction, which will help restore the uptrend in the EUR/USD and lend a helping hand to the GBP/USD bulls.

In the circumstances, I recommend retaining the long positions in the pound formed at the breakout of the resistance at 1,323. The initial target is the area of 1.3425-1.345.  

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The pound threw down the gauntlet before the dollar

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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