06.07.202013:27 Forex Analysis & Reviews: The pound uses a buffer

The resumption of Brexit negotiations is an important reason to look at the British pound. London and Brussels accused each other of missing the deadline for assessing access to financial services markets, and banks in the Foggy Albion warned that this could end badly: if the principle of equivalence, which the EU insists on, is not met, European customers will be forced to leave London. This process may take several months, so fresh decisions on Brexit are needed right now. More precisely, until the end of July. And if they are obtained, sterling can spread its wings.

Gloomy forecasts for a deeper recession in Britain compared to other countries of the Old World, the risks of the introduction of negative interest rates by the Bank of England, as well as the impasse in Brexit negotiations, do not allow the pound to continue its northern March. At the same time, the "bulls" for GBP/USD are drawing strength from the epic rally of the US stock market. Sterling's volatility remains elevated compared to other G10 currencies, which makes it more responsive to changes in global risk appetite. In this regard, the growth of the S&P 500 is a kind of buffer for the "bulls" on the analyzed pair.

Dynamics of the S&P 500 and GBP/USD

This is not to say that everything is hopeless in other areas. Yes, the death rate from COVID-19 in the Foggy Albion is higher than in other European countries, and Andrew Bailey in June sent a letter to banks that the transition to negative rates will be a serious shock, as it will have to update computer programs, rewrite contracts and communicate with customers in a new way, however, at the beginning of July, much has changed. Representatives of the Bank of England, led by chief economist Andy Haldane, who voted against extending QE by £100 billion at the last MPC meeting, are increasingly talking about a faster recovery in GDP compared to forecasts. If this happens, additional monetary incentives, including a drop in the repo rate below zero, will not be required.

Yes, EU chief negotiator Michel Barnier claims that the parties have serious differences of views, and Angela Merkel said that the EU should prepare for the worst-case scenario, however, British Prime Minister Boris Johnson is optimistic about the conclusion of an agreement, and David Frost called the talks "comprehensive and useful". The same Barnier no longer insists that the European Court of Justice is the truth of last resort, and MUFG Bank claims that if the good news on Brexit begins to arrive before July 31, the pound will rush north.

In my opinion, only a serious increase in mortality from COVID-19 can frighten investors and provoke a deep correction of the S&P 500. The stability of the US stock index faithfully serves as the GBP/USD, and its further growth, together with the positive Brexit, will contribute to the pair's purchases on breakouts of resistance at 1.254 and 1.26 in the direction of the target on the AB=CD pattern near 1.3. Technically, this strategy is confirmed in the implementation of the price action expanding wedge model.

GBP/USD, the daily chart