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19.09.201901:13 Forex Analysis & Reviews: GBP/USD. Weak inflation and harsh statements by Junker: what is the secret of the pound's "stress resistance"?

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The pound moved away from its peak of the week and month (1.2526) against the dollar today, returning to the framework of the 24th figure. In general, during the European session, the GBP/USD pair showed weak price fluctuations, literally within the 40-point range. But this fact is rather surprising, given the entire array of negative fundamental factors.

The current behavior of the British currency is indeed anomalous. After extremely weak data on inflation in the UK, after pessimistic statements by Jean-Claude Juncker and the same pessimistic statements by Boris Johnson, the pound not only did not collapse to last week's levels, but also restored points lost in the morning at the beginning of the US session. According to some analysts, such a "stress tolerance" of the pair is associated with future events. Like, on the eve of the announcement of the results of the Fed meeting, no one risks opening large positions - neither against the dollar, nor against the pound. In addition, the Bank of England's meeting is expected tomorrow as well as the publication of a summary of monetary policy.

Exchange Rates 19.09.2019 analysis

The above events, of course, restrain many market participants - in such periods it is much safer to "sit on the fence." But in my opinion, the stability of the British currency is primarily due to the Brexit issue. Leaving aside the warlike statements of Juncker and Johnson, the market focused on other facts that speak in favor of the negotiability of the parties.

The first fact is obviously optimistic. Today, the European Parliament agreed to delay Brexit. Although the text of the corresponding decision abounds with a multitude of "ifs," the market reacted positively to this. By and large, Europe has taken the first step towards London, and now the only question is for Johnson to make a similar maneuver towards Brussels. But the odious prime minister does not get tired of repeating that he does not intend to ask for a postponement at the summit of EU leaders on October 17-18. Instead, he will try to make a new deal, hoping to agree on a solution to the problem along the Irish border. The European Commission has already expressed bewilderment in this regard: Jean-Claude Juncker said that Britain has not yet submitted a single proposal for Brexit. At the same time, the head of the EC specified that the risk of a "hard" scenario is growing every day, since there is very little time left to conclude an agreement.

But this, so to speak, is only the external side of the issue. But "behind the scenes" is a completely different political game, the details of which became known to journalists of the influential publication The Guardian. With reference to their sources in the British government, the authors of the sensational material argue that in fact London is negotiating with Brussels on a new agreement, however, very peculiarly. The British negotiators are conducting "oral consultations", but at the same time they refuse to provide any written proposals to their European colleagues. As informed sources told reporters, the British are afraid of "very long discussions" or public criticism, therefore they want to submit written proposals to Brussels literally in the last minutes before the October summit. According to the draft version of the deal (in Johnson's interpretation), London will exclude the backstop clause from the text of the agreement, and instead of this mechanism will propose an alternative (which one is still unknown).

By and large, this information, which, of course, is unconfirmed, is in good agreement with Johnson's political behavior and his earlier statements. In the summer, he announced that if the backstop mechanism was abandoned, the parties would make rapid progress on the issue of concluding an agreement. Here are just some alternative ideas for the "back stop" he did not voiceso - neither the public nor to the negotiating group. In addition, there is a version that Johnson leads the country "at full speed" to the hard Brexit only so that the EU "flinches at the last moment", that is, literally on the last day before the "X-hour". Allegedly, in this case, Brussels may succumb to blackmail and show political flexibility, at least in the matter of back-stop. Of course, given the eccentricity of Johnson, this option was initially "on the lips" of many analysts. Insider information of The Guardian only confirmed the realism of this scenario.

Exchange Rates 19.09.2019 analysis

Thus, traders do not give up hope for a deal, especially against the background of today's decision of the European Parliament and insider British press. Due to these factors, the pound is actually kept at the boundaries of the 25th figure, ignoring all other signals. Indeed, in other conditions, the sterling would have fallen in price by at least 1-2 figures, after the release of data on the growth of British inflation (I recall that the core consumer price index collapsed to around 1.5%).

This fact suggests that traders of the GBP/USD pair may just as well ignore the overall growth of the US currency if the results of the Fed meeting are in favor of the greenback. The Brexit theme still takes precedence over other fundamental factors, so any positive rumors or comments in this context will lead the pair to at least 1.2540 (the upper line of the Bollinger Bands indicator on the daily chart).

Irina Manzenko
Analytical expert of InstaForex
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