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Today, currency pairs of the so-called "major group" showed relatively weak volatility. Only the euro/dollar pair is trying to rise ahead of the EU summit, which is due to take place at the end of this week. The rumors preceding this event are encouraging: the parties are likely to agree on a 750-billion-euro anti-crisis plan of the European Commission. This general confidence (in my opinion, it is premature) pushed the euro up, including against the US dollar.
On Monday, the pound/dollar pair also traded well during the Asian session. The pair once again tested the resistance level of 1.2660 (the upper line of the Bollinger Bands indicator on the daily chart). However, at the beginning of the European session, the price fell. The pound/dollar bears are very phlegmatic, but still persistently trying to return the pair to the area of the 25th pattern.
In general, market participants took a wait-and-see approach. Traders have no intention to open positions on Monday against the background of almost empty economic calendar. Today, a speech of the head of the Bank of England, Andrew Bailey is the most significant event. Andrew Bailey will take part in a webinar organized by the Federal Reserve Bank of New York. However, during such events, regulators rarely voice specific intentions in the context of the monetary policy prospects (as a rule, only advantages and disadvantages of a particular scenario). Therefore, Bailey will hardly influence pound/dollar traders today.
However, tomorrow, the UK will publish preliminary data on the British GDP in May. This release is very important. The fact is that the previous report reflected the peak of the coronavirus crisis.
Notably, in April, the UK's economy shrank by 20.4%. It was the largest drop in the country's history. Significant losses were also recorded in imports and exports, while the air transport sector collapsed immediately by 92%. Due to the closure of hotels, bars and restaurants, the services sector declined by 88%. Almost all sectors of the country's economy have been affected by the coronavirus crisis. The industrial production indicator also showed an anti-record (-20.3%), and the manufacturing production decreased by almost 30% on a yearly basis. Data on unemployment and inflation only added fuel to the fire. Thus, the number of applications for the unemployment benefits jumped to 528 thousand. Data on wages also came out in the red zone both on the annual and monthly basis.
The above figures reflect the April peak of the coronavirus crisis. In May, the UK began to gradually come out of the quarantine, so traders expect to see signs of recovery in the country's economy. Otherwise, the pound sterling may again be under significant pressure.
According to preliminary estimates, in May, GDP recovered to 5.5% on a monthly basis. However, on a yearly basis, the indicator declined to -17.5%. In addition, the UK industrial production data will be published tomorrow. Markets expect that it will grow by 6.2% on a monthly basis and drop by 21.2% on a yearly basis. The country's manufacturing production also advanced by 7.5% on a monthly basis and declined by 24.2% on a yearly basis. The monthly and annual dynamic of activity in the country's construction industry will also be published tomorrow. Thus, the indicator may rise on both annual and monthly bases.
In other words, traders are expecting a weak but still positive trend. In May, Britain started easing quarantine restrictions, so investors do not expect any breakthrough. The trend is really important. If the indicators enter the "green zone", the pound/dollar pair may again test the resistance level of 1.2660 and even approach the 27th pattern. Otherwise, bears will send the price towards the 24th price level.
In my opinion, in any case, only short positions should be opened. The fact is that the issue of further relations between London and Brussels is still hanging in the air. Despite the ongoing negotiations, British Prime Minister Boris Johnson goes on repeating that his country is ready to trade with the EU under the rules of the World Trade Organization. Just a few days ago, the head of the British government announced this to the German Chancellor during a telephone conversation. At the same time, recent surveys showed that no more than 30% of the British companies are ready for the so-called "Australian scenario" (in which almost all types of goods are traded under the WTO rules).
Thus, traders ignored the issue. However, the situation may change dramatically as soon as representatives of the negotiating groups meet again. In the near future, the parties are unlikely to please us with a breakthrough in the negotiation process. This means that the growth of the pound/dollar pair is temporary, and therefore, long positions still look risky. Thus, it is recommended to sell the pair from the current positions or from the resistance level of 1.2660 (the upper line of the Bollinger Bands indicator on the daily chart).
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