14.07.202009:18 Forex Analysis & Reviews: Will the pound reach a parity with the euro?

The current week may present the British currency with new surprises related not only to macro statistics, but also to rivals in the GBP/USD and EUR/GBP pairs. Experts fear that the pound may reach parity with the European currency this year, dropping to critical values.

The question of parity arose not by chance, and it concerns mainly the EUR/GBP pair. According to analysts, the introduction of negative interest rates by the Bank of England may become a "trigger" for the implementation of such a scenario. This question, which has recently gone into the shadows, may enter the stage again.

According to the currency strategists of Rabobank, the decline of the pound to parity with the euro is possible if the regulator "drops" interest rates below zero, and the UK fails when concluding a trade deal with the EU. After that, Rabobank believes that the implementation of such a scenario will be inevitable. In this situation, the EUR/GBP pair will suffer the most, which will soar from the current 0.8994 to 0.9200.

Analysts' concerns about Brexit and the subsequent trade deal are justified: the issue of "soft" UK exit from the European Union has been circulated for many months, but, according to the proverb, "things are still there." There is no progress in the recent negotiations between London and Brussels, and each side insists on its own, considering that its decision is the only correct one.

It can be recalled that at the moment, the United Kingdom does not have additional time for a smooth economic transition (that is, there is no transitional time period). Earlier, Boris Johnson, the Prime Minister of Great Britain, refused to renew it. As a result, analysts say that Brexit without a deal should end on December 31, 2020. The British authorities urge companies and private entrepreneurs to prepare by the end of the year for the changes that will bring the country's exit from the EU, but most business representatives do not feel prepared for such a turn of events.

Earlier, B. Johnson said that the UK is ready to trade with the EU according to the rules of the World Trade Organization (WTO). However, not all British companies agree to these conditions: about 30% is against the so-called "Australian scenario", which the Prime Minister plans to implement. It should be noted that this scenario involves conducting trade according to the rules of the WTO. This requirement applies to almost all types of goods.

The inability to agree on a mutually beneficial Brexit along with the negative rates undermine the pound's position. The volatility of the pound is amplified against the background of current uncertainty, increasing investor distrust of it. Experts emphasize that this negatively affects the dynamics of the GBP/USD pair. At times, the growth of the pair is extremely unstable and temporary. Against this background, experts warn of the risk of opening long positions.

On Monday, July 13, the GBP/USD pair reached the resistance level of 1.2660 and tried to rise higher. However, the pair could not repeat this record the next day. On Tuesday morning, July 14, the GBP/USD pair was trading near the level of 1.2555, but then went into a bearish spiral.

Currently, the market is awaiting May reports on the state of the British economy. According to experts, the current macroeconomic data can significantly affect the further dynamics of the pound. Traders and investors are counting on relatively positive news, as the April data brought a lot of negativity to the market.

It can be recalled that the UK economy hit an impressive 20.4% in April 2020. The largest losses were recorded in terms of import and export volumes against the backdrop of the COVID-19 pandemic. Almost all sectors of the economy were hit, and the British services sector plummeted by a record 88%. Shocking data on inflation and the labor market worsened the situation: the number of applications for unemployment benefits soared to 528 thousand, and the level of salaries declined significantly.

The last month of spring may be more positive economically. According to preliminary calculations, the British GDP is expected to recover to 5.5% per month, but the picture is not so rosy on an annualized basis: a decline to -17.5% is possible. The May indicator of industrial production can become a drop of sun in the cold water of financial statistics: it is possible that it will grow to 6.2% mom and to -21.2% yoy. It can be recalled that the previous value corresponded to -24% yoy.

In general, the market does not expect a major breakthrough from the British economy, which barely began to weaken the quarantine "reins" in May. However, traders and investors are counting on positive movements in this direction in order to get certain guidelines for further actions. If the current macroeconomic indicators come out in the green zone, the GBP/USD pair may return to its starting point and reach the resistance level of 1.2660 again.

According to analysts, this stomping on the spot, without a hint of progress, reminds "Sisyphean" labor, which means a task that can never be completed. The pound has to conquer the conquered peaks again and again, but small movements in the dynamics of the GBP/USD pair are fixed from time to time. In the case of positive macro statistics, the pound is able to get out of the downward trend, and to prevent parity with the euro in the future. At the same time, the GBP still does not succeed in finally losing the role of a loser of the financial front. However, experts expect that the pound will reach the heights it deserves and will strengthen its position in the future.