17.10.201802:31 Forex Analysis & Reviews: GBP/USD: whether to believe the optimism of the bulls?

Published data on the UK labor market again raised the importance of soft Brexit in the context of monetary policy prospects. Experts started talking about the fact that in the event of a deal, the Bank of England may raise the rate twice next year, and for the first time in February. Earlier, a later date was discussed – traders focused on the summer months of 2019. But the dynamics of the key macroeconomic indicators of the British forces us to revise the previous forecasts.

Traders are not confused by the fact that the number of applications for unemployment benefits increased to 18.5 thousand. Although this indicator shows gradual growth since June, adversely affecting the overall picture of the labor market. But the market focused on other components: in particular, the unemployment rate remained at a record low four percent - this is the lowest level since 1975 (although in 2004 the indicator approached this target, but did not fall below 4.7%). But the most surprising thing today was the dynamics of wage growth. The indicator is growing for the second month in a row, exceeding not only the forecast values, but also long-term highs.

Thus, excluding bonus payments (which are inherently unstable), the figure rose to 3.1% – this is the strongest growth rate since 2009. Taking into account the bonuses, the indicator also exceeded expectations and reached 2.7%, showing a positive trend for the second month in a row. Even the American labor market cannot boast of such results, which has been strengthening for the third year in a row. Despite the fact that Americans have reached full employment, and official unemployment in the United States is only 3.7%, the growth rate of wages there leaves much to be desired. Fed members have repeatedly expressed concern about this, since such a situation negatively affects the growth of inflation indicators.

In Britain, wages have also been criticized by members of the British central bank. But if the trend of the last two months continues, the Bank of England can really bring the date of the first rate hike next year, especially against the background of growth of other macroeconomic indicators. That is why any positive rumors around the prospects of Brexit provide the pound with such strong support – because on the way to tightening monetary policy there is only one factor that can be resolved in the coming days.

It is not the first time to talk about London and Brussels coming close to concluding the deal. The GBP/USD pair follows the headlines and the current comments of politicians – so the price movement is sometimes intermittent. And yet optimism prevails, although the statements of the top officials of Europe, Britain and Ireland are contradictory and heterogeneous. Thus, the German Minister for Europe Michael Roth said in the morning that an agreement between London and Brussels is likely to be reached. Later he was supported by the Prime Minister of Ireland Leo Varadkar - however, in his opinion, the negotiation process should be extended until November or December.

But the President of the European Council Donald Tusk voiced a pessimistic scenario. He noted today that there is no reason for optimism, and the parties should prepare for a "hard" Brexit, because such a scenario is now "more likely than ever". Theresa May, who spoke in the British Parliament last night, was also restrained in her assessments. According to her, the deal is the best option for both sides, but the compromise has been achieved. The labour leader compared the current situation with the plot of the "Groundhog Day" film, as the negotiation process moves in a circle, but there was no mutually beneficial solution.

In other words, today's growth of the GBP/USD looks, in my opinion, premature and in some sense false. Traders repeat the mistake of a month ago, when the market heard only optimistic forecasts about the informal summit in Salzburg, ignoring the alarming signals. Now the situation repeats itself: none of the high-ranking participants of tomorrow's meeting can say exactly how the negotiations will end, so all the preliminary comments of politicians are assumed. But, judging by the dynamics of the pound, the market was inspired by the statements of several officials who expressed some optimism.

Of course, if tomorrow the parties really find common ground on the main issues (especially on the Irish border), the pound paired with the dollar will grow impulsively by several hundred points, thus giving rise to a protracted upward trend. But otherwise, the pair will collapse much more than a month ago-because there is less and less time for further negotiations.

Summing up, it should be noted that technically the GBP/USD pair is still upward: this is indicated by the location of the price between the middle and upper lines of the Bollinger Bands indicator on D1, as well as the formed bullish signal of the "Parade of lines" of the Ichimoku Kinko Hyo indicator. But in the coming days, the material will not "work", since the fate of the pair will depend on the outcome of the October summit. In the context of the current situation, it is best to stay for some time "on the fence", that is, to take an observant position and not open trade orders.