Yesterday, the GBP/USD pair tested the two-week highs, reaching the middle of the 30th figure. This price impulse was due to several factors that simultaneously supported the British currency and "stoked" greenback.
Of course, the focus of GBP/USD traders is Brexit. Tonight (around 8:30 pm) the key meeting of the British Prime Minister with the head of the European Commission will take place. according to representatives of the parties, this dialogue can solve the main problem of the negotiation process, where the great significance of this meeting was stated both in London and in Brussels. We are talking about finding alternatives opposed by many members of the British Parliament. Let me remind you that the initial text of the transaction assumed that within two years after Britain's exit from the EU until 2021, the parties would create a mechanism that would rule out the appearance of a "hard" border between Ireland. Otherwise, the border remains transparent and Northern Ireland will follow the regulations governing the single European market.
The British Parliament has rejected such a deal, and now May is trying to get assurances from the EU that the backstop regime will have an expiration date, which of course in case that it is needed at all. Over the past months, Brussels tirelessly repeated the mantra that Europe will not revise the agreement, which has already been approved by the EU members. The Europeans voiced a similar thesis yesterday.
Nevertheless, the pound rose impulsively at the end of the American session on rumors that the dialogue between May and Juncker was capable of moving the issue from a dead end. It should be immediately noted that this information has not been confirmed by anything. These are just newspaper rumors that have been brought down by traders more than once, especially on the question of Brexit. Moreover, according to other information, Juncker will continue to uphold the European position and does not expect any breakthrough from the meeting, which is the reason of yesterday's growth of GBP/USD pair did not continue today. Until the announcement of the results of the negotiations, the pound is likely to remain under pressure.
It is also worth noting that yesterday's growth of the pair was also due to a decrease in the dollar index. The US currency depreciated across the market, responding to dovish comments by Fed representative Loretta Mester, as well as rumors that the White House is ready to conclude a broad bargain with China.
Thus, the head of the Federal Reserve Bank of Cleveland Mester said that the interest rate is forced to follow the changes in the economy under current conditions and not to keep the vector of its movement "once and for all". In this case, the most likely scenario in her opinion implies a slowdown in economic growth and employment. As for inflation, its level will not exceed the target value, although it will be about two percent. In other words, Mester was pessimistic about the growth prospects of key macroeconomic indicators. Yet in the given positive dynamics, she did not rule out a slight increase in the rate to a neutral level, which in her opinion, is at a three percent mark.
The dollar reacted to these comments with a sharp decline across the market but the southern dynamics was limited. The fact is that Mester this year has no right to vote in the Fed, so its statements have an indirect effect on the market. Instead, another fact surprised here is the head of the Federal Reserve Bank of Cleveland over the past years has consistently advocated a gradual tightening of monetary policy, even when inflation was far from target values. Now, she has somewhat changed her position, emphasizing that the interest rate will follow the economic situation in the country. In other words, the Fed's "dovish wing" was supplemented by another official (albeit without a vote in 2019), and this fact again reminded traders of the wait-and-see position of the American regulator.
Thus, the growth of the pound/dollar pair is impulsive and fragile, as it is based on unreliable fundamental factors. If today's meeting ends without result, the pound will not only lose the points gained but also return to the area of 28-27 figures. The decline in the dollar index should also be treated with caution. The US-China talks are yet completed and rumors circulated about the White House's readiness to conclude a deal are rumors. Above all, the reliability of which is highly questionable.
Given this vague fundamental picture, it is advisable to take a wait-and-see position on the GBP/USD pair at least until the announcement of the outcome of the negotiations between May and Juncker. If they hint at a compromise on the Irish border issue, the pair will impulsively jump to the top line of the Bollinger Bands indicator at 1.3215 on the daily chart. In another scenario, the pair will demonstrate a deep pullback to the 28th figure.
