The pound is under pressure again, not sooner after getting rid of the burden of uncertainty associated with Brexit. This is because the issue of the negative rate returned to the agenda: Bank of England's representatives started discussing the prospects of easing the monetary policy again. The market, in turn, interpreted the hypothetical messages voiced more categorically, setting the date of the rate cut for May. Such a fundamental outlook did not allow buyers of the GBP/USD pair to develop an upward trend, especially amid the strengthening of the US currency.
In my opinion, the British currency has not yet realized its growth potential and has not fully used the Brexit situation. After the New Year's holiday, events in the US overshadowed all other fundamental factors, while the COVID-19 anti-records in the UK did not allow the GBP/USD bulls to fully show itself. As a result, the pair was stuck within the 35th figure, reacting to the news flow.
Yesterday's price decline of the pound/dollar pair was not only due to the general strengthening of the US currency. The British pound was also hit by a wave of sales amid comments by Silvana Tenreyro, a member of the MPC of the Bank of England, wherein she talked about the issue of reducing the interest rate again. Therefore, the GBP/USD reacted immediately by declining for more than 100 points, that is, to the middle of the 34th figure. First, Tenreyro's rhetoric was clearly dovish. In fact, she lobbied for the idea of lowering the rate below zero. According to her, the experience of other countries indicates the effectiveness of negative rates, therefore, the British regulator should at least have the appropriate leverage in the set of tools. Secondly, she was skeptical about the side effects of such a move. In her opinion, there is no clear evidence that negative rates will reduce the profitability of the banking sector. Thirdly, the BoE's representatives expressed doubts about the effectiveness of QE. She believes that the incentive program acts more like a parachute, which prevents falls. At the same time, QE does not stimulate economic growth.
There is no doubt that her comments were extremely dovish – Tenreyro almost directly stated that she would vote for a rate cut. However, this fundamental factor is too unstable and unreliable to open short positions on the GBP/USD pair.
Moreover, rumors and talk about negative rates have been circulating since the beginning of last year. Based on the results of numerous discussions, one definite conclusion can be drawn: not all members of the Central Bank agree to implement this scenario. Even the Central Bank's head, Andrew Bailey, changed his mind on this issue several times, doubting if it's worth it due to its side effects on the country's banking sector. At the last (December) meeting, Andrew Bailey emphasized that this issue is still being analyzed, so it is not advisable to talk about it in a practical plane. It is worth recalling that the Bank of England has been studying this issue for six months – Central Bank's economists interact with the country's financial institutions, modeling and analyzing the consequences of this step. The financial institutions were to send their responses to the relevant requests by mid-December, while the regulator is expected to present the results of its research at the February meeting.
According to preliminary (unofficial) data, the "dovish" initiative of the Central Bank led to an extremely negative reaction not only from large banks, but also from depositors. There is also no consensus on this matter among the members of the Committee. In their public speeches, many of them (in particular, David Ramsden and Andy Haldane) opposed such an extraordinary and controversial step. In turn, Silvana Tenreyro, along with her colleague Gertjan Vlieghe, has consistently lobbied for the idea of lowering the interest rate to the negative area throughout the year. Therefore, if we consider her rhetoric in the context of this issue, we can conclude that the market reacted too emotionally to her words. However, this conclusion is also confirmed by the fact that the downward impulse of GBP/USD did not continue. Today, the pound has regained its position, returning to the borders of the 36th mark.
This is due to today's speech of the Governor of the Bank of England, Andrew Bailey. He said that the impact of the pandemic on the economy was weaker than last spring. And although he did not talk about the prospects for the interest rate, his optimistic rhetoric neutralized Tenreyro's pessimism yesterday.
Technically, the pair's next behavior will depend on how the US currency behaves. The US dollar index is flat today, reflecting the indecision of dollar bulls. At the same time, the USD took a break after multi-day growth, amid significant events in Washington and rising Treasury yields. As a result of this break, the GBP/USD bears will try to decline again before the Congress votes on impeachment. In turn, dollar bulls can use this information (growth of anti-risk sentiment) in their favor, to pull the pair to the base of the 35th figure. The support level is 1.3500 – middle line of the Bollinger Bands on the daily chart. We can consider long positions to the local high of 1.3630 in the next corrective decline.
