The fundamental picture for dollar pairs is changing with kaleidoscopic speed - the US currency was on the horse yesterday, being in demand amid rising anti-risk sentiment and the phlegmatic position of the Federal Reserve. But the situation has changed dramatically today. The EUR/USD pair returned to the 10th figure, and the GBP/USD pair again tests the boundaries of the 31st price level. Other dollar pairs also changed their configuration to one degree or another, due to the general weakening of the greenback. In general, the dynamics of the majors is now determined by the behavior of the dollar - the GBP/USD pair's growth from today is absolutely justified, thanks to the restrained position of the English regulator.
Let me remind you that the Bank of England today held its first meeting this year, which was the last for Mark Carney - the March meeting will already be chaired by Andrew Bailey. On the eve of the January meeting, experts and traders disagreed on what position the English regulator would take. The vast majority of market participants were followers of the dovish scenario. Some of them warned of a rate cut, while others were confident that the central bank would not make hasty decisions, maintaining the status quo until spring.
Each had its own arguments - proponents of monetary easing pointed to a significant slowdown in GDP growth, inflation and retail sales, while proponents of a wait-and-see attitude countered by the fact that the latest data on labor market growth came out better than expected, and Brexit was realized on a "civilized" basis (while it's too early to talk about the outcome of the transition period). In other words, the intrigue of the January meeting remained until the last moment, heating up the already difficult situation in the foreign exchange market. Usually in such cases, the market shows increased volatility when the intrigue finds its solution. And today's case was no exception.
The GBP/USD pair went up even before the press conference of Mark Carney. Firstly, traders saw that the regulator kept the interest rate at the current level (although the probability of a decrease was estimated at almost 60%). Secondly, the bulls of the pair were pleased with the alignment of forces 0-2-7 instead of the predicted 0-3-6. This means that the number of "dissidents" offering to mitigate monetary policy has not increased, although such concerns were, and quite justified. Over the past few weeks, BoE officials have hinted that they are prepared to cut interest rates as a preventative measure. For example, in mid-January, such a possibility was made by Gertjan Vlieghe, who stated that the British economy needed support. He was supported by Michael Saunders, who over the past few meetings has voted in favor of lower rates. Another member of the Committee, Jonathan Haskel, voiced a similar position. Sylvana Tenreyro unexpectedly joined the dovish wing, who announced that she was ready to support the easing of monetary policy. Summarizing the dovish moods, BoE Chairman Mark Carney in one of the latest interviews also did not exclude the implementation of this scenario.
Therefore, most traders were certain that at least three out of 9 members of the Committee would vote for the rate cut at the January meeting. But in reality, the alignment of forces has not changed - only Saunders and Haskel voted for this decision.
Thus, the BoE made it clear that it was ready to continue to maintain a wait-and-see attitude. Of course, the latest trends in the country's economy did not go unnoticed - the regulator lowered its forecast for economic growth, while recognizing that inflation would remain below target level until the end of next year. In addition, the central bank excluded the wording that it was ready for "moderate gradual tightening of monetary policy." However, the market does not expect a rate hike in the foreseeable future, so this fact did not put pressure on the British currency.
But the US currency was under pressure today due to macroeconomic reports. The fact is that the data on US GDP growth were very contradictory. Most analysts surveyed expected the country's economy to grow to 2.1% in the fourth quarter of 2019. The release fully coincided with this forecast. At the same level, the indicator came out in the third quarter of 2019. The structure of today's release suggests that personal expenses decreased (1.8% against the forecast of growth to 2%) and the level of business investment. Imports also showed negative dynamics, while exports grew by only 1.4%. The market also drew attention to the price index of GDP - it is believed that this indicator is monitored by the Fed "with a particular bias", therefore its negative dynamics largely offset the positive from the release. The indicator came out at 1.4%, although experts expected growth to 1.8%.
In addition, the dollar came under pressure from the political factor - it became known that Bernie Sanders strengthened his electoral position in the presidential race and now lags behind the favorite of the primaries - Joe Biden - by only three percent. In a rivalry with Trump, he wins with a score of 48% against 42%. Sanders has a reputation for being almost a "communist," as he offers to introduce the principles of free medicine to American society, along with free college education, a program of guaranteed jobs and write-offs of student debts. He also advocates for narrowing the wage gap between top managers and employees. According to some experts, if Sanders wins (and this option can no longer be ruled out), the budget deficit will increase in many ways, and "the printing press will work without stopping." Naturally, such prospects, albeit still hypothetical in nature, exert background pressure on the US currency.
Thus, the pound received a reason for its correction today, after many days of pressure from numerous fundamental factors. However, long positions on the GBP/USD pair still look risky. The situation with the spread of coronavirus has not yet reached its climax, and this factor can unfold the pair at any time - for example, when the number of cases exceeds the 10,000th mark or the first death from "Wuhan pneumonia" outside of China is recorded. Another surge in anti-risk sentiment will temporarily restore confidence to the dollar.
