The British pound saw its worst week since mid-May. Even an impressive growth in retail sales by 12% m /m failed to support the bulls. The bears, on the other hand, are gaining ground on such strong factors as the expansion of the quantitative easing program and a rise in government debt. It was reported that UK government debt exceeded the gross domestic product first time since 1963. Over the past year, the national debt of the UK government has increased dramatically and has reached the amount of £2 trillion. Obviously, it takes a lot of money to cope with the fallout of the coronavirus pandemic. It is planned that by the end of the current fiscal year the amount of government borrowing will increase up to £300 billion. This is twice as much as during the economic crisis in 2008-2009, and is equivalent to 15% of the national income.
A huge public debt means that the economy will recover from recession at a very slow pace. This idea coupled with concerns about the British labor market forced the Bank of England to expand its QE program by £100 billion at its June meeting. This decision was supported by 8 out of 9 votes.
Amid such negative background, it may seem that the pound is doomed to a failure. At the same time, purchases of BoE bonds are gradually slowing down. The stabilization in the financial markets does not require the regulator to participate so actively as before. The share of emission funds taken by private lenders will only increase. Andrew Bailey and his colleagues believe that GDP will contract by 20% in the second quarter instead of 27% as was previously expected. That is, the recession may not be so deep, and the economic recovery will take less time, judging by the sharp rise in retail sales. It may well be that the data on business activity in June will add optimism to the market and will prompt purchases on GBP/USD.
In addition, the Brexit talks are showing some progress. First of all, London and Brussels agreed on a deadline. Active negotiations will start in late June, and the trade agreement should be concluded in the autumn so that it can be ratified until the end of 2020. Secondly, it was agreed that Britain can derogate from some of the EU trade standards, but must accept the tariffs related to these derogations. Finally, the EU will adhere to its own principles, but will be creative in interpreting them. It seems that the parties are steadily moving in the direction of signing the agreement. So traders, who have almost lost faith in the positive outcome, can push the GBP/USD pair higher.
However, on Forex, any currency pair needs the effort from both sides. A reduced demand for Fed currency swaps from the largest global central banks and the associated reduction in the cost of raising capital is good news for risk assets. However, this is not good for the American currency. Meanwhile, the US stock indices were about to develop a downward correction. But as the daily death rate from COVID-19 in the United States has reached its low since March, and China has announced its plans to increase purchases of US agricultural goods, the correction has stopped. The improvement of the epidemiological situation and the lack of any trade wars created favorable conditions for purchasing the S&P 500 and the GBP/ USD pair. The breakthrough of the resistance level at 1.245 and 1.254 may serve as the main reason for opening long positions. The level of 161.8% may serve as the main target for opening buy positions according to the AB = CD pattern.
