16.01.201800:05 Forex Analysis & Reviews: GBP/USD: British inflation temporarily eclipses Brexit

The US dollar continues today to swoop down on the entire market: the strongest losses of greenback are paired with the euro, the yen and the Australian. But the pound-dollar pair is behaving somewhat more modestly, although it is at multi-month highs. The last time the British currency was in the area of the 38th figure was in June 2016, during the declining phase after the announcement of the results of the referendum on the withdrawal from the EU.

The subject of Brexit has accompanied the pound for almost two years, and the last price surge also occurred partly because of the discussion of this issue. At the end of last week, the GBPUSD pair grew by almost 300 basis points in just two days, and today the upward trend brought the price to the boundary of the 38th figure. Weakness of the US currency is not the only reason for the pair's price increase. Interest in the British pound has increased after unexpected information that the finance ministers of Spain and the Netherlands support the "soft" scenario of Brexit. On one hand, this fact to some extent increased the likelihood of concluding a mutually beneficial deal between Brussels and London, but on the other hand, official representatives of these countries disavowed such an unambiguous position: they said that "Spain and the Netherlands support the EU negotiator for Brexit Michel Barnier. " In other words, the Spaniards and the Dutch did not officially want to "formalize" a soft position against the British.

In any case, statements by officials of only two EU countries are clearly not enough to ensure optimism or pessimism. After all, we do not yet know the final position of Germany on this issue. Complex coalition discussions hindered Angela Merkel in this regard, although the role of the Germans in the negotiation process is key.

Now that Merkel and the Social Democrats have agreed to start negotiations on a coalition, it can be assumed that Germany will soon express its position on the second stage of the talks. The policy document, which was signed by the future members of the coalition, includes only general phrases and declarative intentions, so it is too early to draw any conclusions about this. In addition, the "majority coalition" should still be supported at the SPD congress (January 21), although there are many critics of the idea among the Social Democrats.

All this suggests that the Brexit factor will continue to serve as a fundamental background for the British pound, and the GBPUSD pair will respond to comments from politicians or officials. But the reaction to their words will be short-term before the official negotiations begin.

But the question of tightening monetary policy by the Bank of England may again be at the forefront if the British inflation does not disappoint investors tomorrow. The forecast is generally neutral: according to most analysts, the consumer price index in monthly terms should grow to + 0.4%, and in the annual one to slow down to 3%. Even if the indicator is released at the forecast level, this would indicate a significant inflationary pressure, because the indicator is at the level of a multi-year high.

And although the latest PMI data was below the expected values, optimism about the British economy remains. According to the Institute for Economic and Social Research (NIESR), Britain's GDP grew by 0.6% in the fourth quarter of last year, demonstrating a positive trend. If inflation also appears in the "green zone", then the probability of an increase in the rate at one of the spring meetings of the English regulator (tentatively in May) will again increase. At the end of last year, Mark Carney talked about the gradual process of tightening the parameters of monetary policy until 2020. But the growth of the world economy, the oil market, as well as the improvement of domestic macroeconomic indicators can accelerate the sounded pace. And if inflation indicators grow even faster, the Bank of England will be forced to react to this fact, despite the relatively weak growth of wages.

So, tomorrow is an important day for the pound. Dynamics of the CPI either confirms the upward trend, or determines a corrective rollback. Weakness of the US dollar in this context will serve as a backdrop: a cheap greenback or limit the fall of GBPUSD in case of negative data on British inflation, or strengthen the positive effect of strong CPI figures.

The "depth" of the probable corrective rollback is determined by the support levels. The first one is located at 1.3640 - this is the Tenkan-sen line on the daily chart. A stronger support level is at 1.3500, the middle line of the Bollinger Bands indicator on D1.