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Will the Bank of England be able to stop the prolonged fall of the British pound? The answer to this question worries financial markets. Derivatives contracts expect a repo rate cut in 2020, while Mark Carney claims that it will be raised more than the market expects. BoE's monetary policy committee member, Michael Saunders, believes that there's no need to wait until the political fog over Britain disperses and chief economist Andy Haldane says that the time for monetary restriction is approaching. If the Bank of England presents a "hawkish" surprise, the sterling can feel the ground under their feet. Although, it is unlikely that we will talk about the reversal of the downward trend in the GBP/USD pair.
The main driver of the peak of the pound is that investors' fears about the indiscriminate exit of Foggy Albion from the EU. Brussels has made it clear that he is not going to change the terms of the agreement and if the post of Prime Minister is taken by Boris Johnson, the risks of parting London and Brussels without a deal will increase dramatically. The ex-foreign minister and ardent supporter of Brexit have the most preferable chances out of all the candidates for the Conservative Party leadership role. Bookmakers rate them at 70%. Johnson even allows himself not to appear on TV debates.
In a situation where politics becomes the main driver of the peak of sterling, the Bank of England feels confounded. Formally, he could retreat from his former "hawkish" rhetoric, because when internal statistics fail, the external background deteriorates. Business activity indicates a potential slowdown in the GDP of Foggy Albion from 0.5% to 0.2% q/q in April-June. The escalation of the US-Chinese trade conflict threatens to reduce external demand for British goods and the Fed is starting to hint at a monetary easing politicians. The rest of the central bank issuers of major world currencies follow the Fed. The reserve bank of New Zealand and Australia have already reduced rates. Meanwhile, the ECB and the Bank of Japan are ready for additional monetary stimulus.
Dynamics of the average rate of the leading central banks of the world
Against this backdrop, BoE looks like an outcast, which under normal conditions would have served a good service to the pound. Alas, the current situation on the political Olympus of Britain is hardly normal.
The GBP/USD quotes wander near the minimum mark since the beginning of the year. According to the consensus forecast of Bloomberg experts, it is ready to sink to 1.24 if Johnson takes the post of prime minister. Next, economists are betting on the parliament of Albion, which in their opinion, will not allow political chaos. However, we are talking about medium-term forecasts because the name of the new head of the Cabinet of Ministers will be announced at the end of July.
In the short term, the dynamics of the analyzed pair will be affected by the meetings of the Fed and the Bank of England, as well as the release of data on British inflation. Bloomberg experts expect consumer prices to slow in May from 2.1% to 2% and core inflation from 1.8% to 1.7%.
Technically, the inability of the GBP/USD pair to form a double bottom will increase the risks of continuing the downward campaign in the direction of targets by 88.6% and 261.8% for the Bat and AB = CD patterns.
GBP / USD daily graph
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