The pound actively surged, despite the disappointing data on the growth of UK inflation. The market ignored the fact that today's published data was in the "red" zone. GBP/USD traders are completely absorbed in Brexit, as the negotiations have already entered their final stage. Moreover, a lot of optimistic forecasts regarding the prospects for concluding a deal are heard in the market today. The primary reason is Ursula von der Leyen's encouraging statements. Although the head of the European Commission clarified that the fishing issue is still unresolved, she stated that there is a progress in negotiations.
This fact allowed the buyers of GBP/USD to test the 35th mark again, after the bears took control of the situation last Friday, who pushed down the price to the level of 1.31. It can be seen that the market is now very "trusting" – it quietly follows conflicting fundamental signals, although traders are sure that an optimistic scenario will be implemented. Therefore, market participants react more sharply to positive news, while pessimistic signals are treated with a certain degree of skepticism. For example, Reuters reported yesterday that during a close meeting, Boris Johnson recommended to the ministers to prepare for a "hard" scenario, that is, without a deal. However, this kind of threat (which was probably deliberately "leaked" to the press) did not make the proper impression on traders. The pound was under pressure for several hours, but it still surged, updating the weekly high at the end of Tuesday's trading day.
According to the available information, the negotiating groups were able to agree on all key issues, except for fisheries. The question still remains whether Britain will decide to close off the problem of shared access to fishing waters. However, journalists from the influential Financial Times think that the British do not really intend to lose the single market, since the affected party will ultimately be Britain, not the European Union. The fact is that the UK directs more than 40% of its exports to the EU countries, while the key countries of the Alliance direct only 5-6% of their exports. At the same time, Europeans do not seriously consider the hypothetical advantage of the "Australian scenario", while the "Canadian scenario" was initially rejected. According to FT insiders, the deal will be initially concluded at the last moment and secondly, on the actual terms of the Europeans. According to informed sources of the publication, Brussels will agree to make certain concessions, thus securing its success in the negotiation process. And judging by the latest statements of top politicians, the above scenario is gradually being implemented.
Now, let's talk a little about today's macroeconomic report. It is noteworthy that the dynamics of UK inflation was disappointing. The general consumer price index in November fell to -0.1% on monthly terms, while a downward trend was also recorded in annual terms. The indicator dropped to 0.3%, which is the weakest growth rate since August this year. Core inflation was also disappointing – the core CPI came out at 1.1%. The retail price index also showed a weak result both in annual and monthly terms.
In light of such disappointing figures that were published before BoE's December meeting, there were rumors in the market about the introduction of a negative rate. In my opinion, these rumors are quite excessive, despite the fact that Central Bank's head, Andrew Bailey, has repeatedly admitted such a scenario.
In view of this, the British press is doubtful that banks will charge customers for placing funds on deposits. The level of profitability of deposits in the national financial system is already minimal (the average deposit rate now does not exceed 0.1% per annum). Therefore, if the rate declines to the negative area, the banking sector will most likely refuse to pay interest on deposits, effectively equating the placement of money on accounts with storage in a safe deposit box.
As for loans, the banks are likely to significantly tighten requirements for borrowers, fearing an increase in the share of "bad" debts, that is, it will become much more difficult to get approval for a loan application. These are just a few examples of the side effects of introducing a negative rate. Therefore, most experts doubt that this step will be the next decision of the English regulator. Analysts do not rule out such a scenario, but attribute it to extraordinary measures – for example, if Britain fails to conclude a trade deal with the European Union.
The pound remains optimistic, while waiting for the result of the key round of Brexit. The European Commission's head announced that there will be a decision for everything in the next few days, that is, before the current week ends. If the parties manage to resolve the fishing issue, then the GBP/USD pair will surge at least to the upper line of the Bollinger Bands indicator on the monthly chart (1.3650), followed by its next target (1.37).
It is recommended to open long positions on the pair, but the high risk of deep downward pullbacks prevents traders from doing this. Moreover, the market is too prone to "panic attacks", especially amid contradictory rumors. Therefore, it is better to take a wait-and-see position for now, despite the growing probability of a final happy ending.
