20.10.202014:24 Forex Analysis & Reviews: GBPUSD: what is wrong with the pound and what prevents bulls from realizing their potential

The British pound is gradually losing its bullish momentum, which was formed earlier this week, and there are a number of objective reasons for this. Due to the resumption of strict restrictive measures, it is likely that the economic momentum that was gained during the summer period will quickly slow down. However, the authorities have no choice, as all measures are aimed at curbing the spread of coronavirus in the UK. Most likely, it will negatively affect the overall figure for the 4th quarter of this year. There is little doubt that the British economy will start to stagnate again by the end of this year. Due to the likelihood of a lockdown and a hard Brexit, the pound will continue to remain under pressure from other world currencies, especially the US dollar, as the aggravation of the situation with COVID-19 will again return demand for safe-haven assets.

The high concern about the current situation was shown today during a speech by a member of the Monetary Policy Committee of the Bank of England, Gertjan Vlieghe, who signaled that the Central Bank will probably resort to monetary policy easing and strengthen stimulus measures in the near future. This will be done because of the sharp resurgence of coronavirus cases in the UK, which is negatively affecting the economy. Gertjan Vlieghe also noted that downside risks to the economic outlook, which have been so often discussed at the Bank of England recently, are beginning to materialize. This forces us to act ahead of the curve by expanding and extending quantitative easing programs. Vlieghe also reminded that the Bank of England is considering the possibility of introducing negative interest rates and such a decision will seriously affect the position of the British pound. And although the bank's management has not yet come to a decision on this issue, the market is always trading on expectations.

Not so long ago, I spoke about three conditions under which the regulator can take such extreme measures. The first condition is the need for monetary stimulus. Here you can put a tick, because it is already clear how the pace of economic recovery is slowing down, which requires additional cash injections. The second condition is that the positive impact of negative rates should outweigh their negative impact. The Bank of England has recently asked commercial banks to provide specific answers to questions about the impact of negative interest rates on their operations. In Europe, for example, such measures have led to a sharp drop in bank profits. In order to meet the third condition, it is necessary to understand whether negative interest rates should be introduced or whether other monetary policy instruments can be used.

As for the current technical picture of the GBPUSD pair, the bears are focused on the breakdown of the 1.2920 support, from which a powerful rebound took place this morning. We can assume that the static buyer, which last week was at the level of 1.2865, moved there, and the further direction of the pound will depend on how the trading instrument behaves in this range. A break of this level will quickly lay siege to those buyers who were gaining long positions at the beginning of this week, which will lead to the demolition of stop orders and a quick return of GBPUSD to the area of the minimum of 1.2865. If the bulls ignore the next negative portion of news on the UK economy, and a large buyer manages to protect the support of 1.2920, then we can count on an attempt to return to the weekly maximum of 1.3015, with a breakdown of which problems may arise again. Only positive news on Brexit will be able to inspire the bulls to update the levels of 1.3080 and 1.3160.