27.01.202013:49 Forex Analysis & Reviews: The Bank of England will show the pound the way

When everyone buys, there is a great opportunity to sell. The publication of statistics on business activity in Britain in January was another example of the implementation of this principle. At first, encouraged by the growth of the composite purchasing managers' index to the highest level since September 2018, the pound increased to $1.318, but then massive profit-taking by speculators began. As a result, the pound decline below the base of the 31st figure, and the market began to argue that the final figures are not enough to keep the Bank of England from reducing the repo rate at the meeting on January 30.

Weak data on inflation and retail sales, paired with the "dovish" rhetoric of BoE representatives, lowered the GBP/USD quotes below 1.3 and simultaneously raised the chances of monetary expansion at the first MPC meeting in 2020 to 80%. A strong labor market and business activity reduced them to 52%, allowing the pound to recover. No one knows how the Bank of England will behave, which increases the risks of sharp fluctuations in sterling.

Dynamics of British business activity

Forex is confident that the BoE will eclipse the Fed. Its meeting will be the highlight of the last week of January, which makes the pound the main contender for the role of the most interesting currency of the five days. Especially since the official exit of Foggy Albion from the EU is scheduled for the 31st day.

According to Markit, the results of a survey of purchasing managers allow Mark Carney and his colleagues to choose a wait-and-see approach.

Toronto-Dominion Bank, on the other hand, believes that the latest data will be enough to motivate the Bank of England to reduce the repo rate in January. Let me remind you that at the previous MPC meeting, two of the nine representatives of the regulator voted for monetary expansion. At the beginning of the year, two other members of the Committee, including Mark Carney, supported the idea. The weakening of monetary policy is in the balance, which quite naturally attracts investors' attention to the pound.

At the same time, Rabobank advises its clients not to get carried away with short-term fluctuations in GBP/USD caused by the BoE's decision. Even a reduction in the repo rate will not deprive the sterling of such a trump card as the inflow of foreign capital against the backdrop of an improving political landscape. Since the Conservative victory in the parliamentary elections, non-residents have poured about $1.9 billion into specialized funds focused on British assets. Curiously, Bloomberg is spreading insider information that major banks are going to ask the government of Albion for tax breaks of $5.2 billion. Allegedly, the EU offers them good conditions to move their business to the Continent, and London should give something in return for them to stay.

Technically, the daily GBP/USD chart has a "surge and shelf" pattern based on 1-2-3. Only the exit of the pair's quotes outside the consolidation range of 1.2935-1.3225 will clarify the situation. Breaking its upper limit will create prerequisites for the implementation of the 127.2% target for the AB=CD pattern. On the contrary, a successful storm of support at 1.2935 will increase the risks of the pound falling to the target of 127.2% on the "ideal butterfly" model.

GBP/USD, the daily chart