The pound showed a downward trend this morning, being under the aggression of fundamental problems. In view of an informational background regarding the prospects for Brexit negotiations, GBP/USD traders drew attention to key data on the growth of the UK labor market, as well as to the "dovish" intentions of the English regulator.
As a result, the buyers of the pair were forced to leave the conquered highs (that is, from the level of 1.3060) and settle at the base of the 30th figure. In my opinion, this price downturn can be used as an excuse to open long positions, since the outlined progress in trade negotiations neutralizes any negative from macroeconomic reports. As for the intentions of the Bank of England, everything is not so simple here. Rumors about negative rates have been circulating since the beginning of the year, but not all members of the Central Bank agree to implement this scenario. Even the chairman of the Central Bank, Andrew Bailey, changed his mind on this issue several times.
Now, let's start with the macroeconomic reports. It is worth noting here that today's release is not clearly pessimistic. Traders drew attention to the rise in the unemployment rate, which soared to 4.5%, instead of the expected 4.2%, while ignoring the good "salary" figures. The indicator of average earnings left the negative zone, being at zero level for the first time since April this year. On the one hand, this is a doubtful achievement, but, on the other hand, experts expected a further decline in the indicator - to -0.6%. Excluding premiums, the indicator showed stronger dynamics, rising to 0.8%.
In addition, the growth rate in the number of applications for unemployment benefits also came into the positive zone. Considering the tightening of quarantine measures in September, experts expected a sharp surge by almost 80 thousand, but the real situation turned out to be not disappointing – the indicator grew by only 28 thousand. Moreover, this indicator has been showing a decline for two months. In other words, the UK labor market, on the one hand, is undoubtedly experiencing the consequences of the second wave of the COVID-19, but on the other hand, its effect was not as strong as analysts expected.
On another note, the BoE said a few words about its intentions to reduce the interest rate to the negative area. The head of the regulator has repeatedly said that the Central Bank economists are studying this issue and modeling the possible consequences, weighing all the pros and cons. At the same time, many members of the Central Bank expressed opposite opinions on this issue. Just yesterday, Jonathan Haskel announced that he is ready to consider using negative rates. He stated that such a step could harm the profits of banks, but its effect wo;; be offset by a positive contribution to the economy. On the same day, the head of the Bank of England, Andrew Bailey, announced that the Committee members are only thinking about how reasonable it is to have negative rates in the set of instruments. But according to him, the answer to this question will depend on the reaction of banks to relevant requests from the Bank of England. By the way, the slowdown in the growth of the GBP/USD pair is also due to the fact that the British regulator turned to British financial institutions in order to assess their readiness for negative interest rates. Although the official comments of the Central Bank on this step indicate that the very fact of this appeal "does not mean that the Bank will switch to a policy of negative interest rates."
To simply put, there are currently no grounds for a large-scale devaluation of the British currency, although, at first glance, the information background for this pair looks extremely negative (i.e unemployment is growing, the Bank of England is considering a negative rate option, quarantine restrictions are tightening, etc.) But a closer look at the above factors reveals that the problems are "inflated". The UK labor market data are quite contradictory, and the option of reducing the rate to zero is only at the stage of preliminary discussion (and not all members of the Central Bank agree with such an initiative).
All this suggests that the current reaction of GBP/USD was primarily due to the information background regarding the prospects of Brexit. As soon as the first rumors about the possible outcome of the EU summit (which will be held on October 15-16) appear, the market will completely switch to this topic. And if you put together the disparate "information puzzles", you can come to the conclusion that the results of the above summit will be in favor of the British currency. The concessions from Michel Barnier (at least on the issue of fishing), the "conciliatory" rhetoric of Angela Merkel, the optimistic attitude of Boris Johnson – all these factors suggest that the October meeting of EU leaders may end in a victory for London.
Thus, long positions are still a priority for the pair. For reliability, you can wait until the pair breaks through the resistance level of 1.3070 (the middle line of the Bollinger Bands on the daily chart). If buyers sharply consolidate above it, then we can consider long positions to the next resistance level, which is located much higher, at around 1.3220 – this is the upper limit of the Kumo cloud on the same time frame.
