16.01.202009:46 Forex Analysis & Reviews: GBP/USD: the pound continues to ignore alarm signals

The British currency is ignoring numerous negative signals, both from the macroeconomic reports and from the representatives of the British regulator, who have recently voiced "pigeon" theses. The pound remains stubbornly in the area of the 30th figure, reacting rather to political factors, and taking advantage of the weakness of the US currency. However, given the entire array of negative information, the behavior of the British currency looks quite anomalous.

Let me remind you that yesterday, the release of data on the growth of British inflation was a failure. All components came out in the "red zone", significantly falling short of the forecast values. For example, the overall consumer price index fell to zero in December (on a monthly basis) for the first time since July 2019. In annual terms, there is also a downward trend, as the indicator fell to 1.3%. This is the weakest growth rate since December 2016. Core inflation was also disappointing. The core consumer price index came out at 1.4%, a three-year low. The retail price index also showed a weak result both in annual terms (+2.2% instead of the projected growth to 2.3%) and in monthly terms (+0.3% instead of growth to +0.4%). The index of purchasing prices of manufacturers, which in December, increased by only one-tenth of a percent, was also in the "red zone".

It is worth noting that the inflation data only added to the negative fundamental picture, as key macroeconomic reports have recently been disappointing. For example, data on the growth of the British economy was published on Monday, where the UK GDP growth indicator similarly came out worse than expected. On a monthly basis, the indicator fell back into negative territory (-0.3%). In quarterly terms, it increased by only 0.1%. This is the weakest growth rate since June last year. The labor market is also "stalling". According to the latest data, the number of applications for unemployment benefits has increased significantly to almost 29 thousand (with a forecast of 20 thousand). Salaries were also disappointing. Average earnings (including bonuses) rose to just 3.2%. This is the weakest growth dynamics since April of this year.

The last puzzle in this picture will be tomorrow's data. On Friday, data on the volume of retail trade in the UK will be published. According to the consensus forecast, the indicators will show a positive trend due to pre-Christmas and pre-new year consumer activity (+0.8 m / m and 3.0% yoy). Even if retail sales turn out to be weak in the pre-holiday period, it will be possible to speak with confidence about the existing problems of a systemic nature.

Nonetheless, tomorrow's release will not change the situation in any way. Key indicators are slowing down, and this is a fact. Representatives of the Bank of England are increasingly hinting that they are ready to lower the interest rate as a preventive measure. In particular, earlier this week, this probability was allowed by Gertjan Vliege, who said that the British economy needs support. He was supported by Michael Saunders, who has voted for a rate cut over the past few sessions. Another member of the committee, Jonathan Haskell, took a similar position. Silvana Tenreiro also recently joined the "pigeon wing" and announced that she is ready to support easing the monetary policy. The head of the English regulator, Mark Carney, did not rule out the implementation of this scenario as well. He said that the Central Bank has "sufficient room for maneuver" in the context of stimulating economic growth. In recent interviews, he sounded similar hints, preparing the markets for a lower interest rate. The macroeconomic reports published this week only reinforced the "dovish" expectations. At the moment, the probability of monetary policy easing on January 30 (when the first meeting of the Bank of England will be held this year) is almost 70%.

Despite such a massive layer of negative fundamental factors, the pound and the dollar continue to trade in the area of the 30th figure. According to a number of currency strategists, the British currency is still only taking advantage of the vulnerability of the US currency, which has not received support from the external fundamental background. The first phase of the trade deal between the US and China was fully taken into account in the prices, and the signing ceremony did not present any surprises. In addition, the British currency is held by reducing political risks. Just this week, it was revealed that Boris Johnson refused Scotland a second independence referendum, thus extinguishing a source of political uncertainty.

In my opinion, the "stress resistance" of the British currency will be short-term. Traders will not be able to ignore the impending storm of monetary policy easing for a long time. Because of this, the downwards direction of the GBP / USD pair looks to be a priority in the medium term. The nearest target of the downward movement is the 1.2910 mark, which is the lower line of the Bollinger Bands indicator on the daily chart.