The GBP/USD pair has been trading in the 100-pip range of 1.3640-1.3740 over the week, sometimes pushing off from these levels. The weekly chart resembles a piano of black and white keys where the bears and bulls take control of the pair. Yet, both of them cannot break out of the wide-range flat level. Traders are widely discussing the possible growth of the pound sterling as well as the devaluation. It appears that such uncertainty will persist until February 4. On that day, the first meeting of the Bank of England will take place. However, there is another scenario where the GBP/USD pair breaks out of its current trading range. It may happen if the US dollar index will pick up a trend.
Last week, the US currency enjoyed steady demand. The US dollar index held above the 90 level. However, the US dollar index is also trading flat. Since January 8, that is, for the third week in a row, the US dollar index has fluctuated within the range of 90.06-90.75. Similarly, bulls are gaining momentum, then losing their positions, but they do not leave the specified range.
It is obvious that traders are waiting for drivers that would help the pair break out of its flat phase. In my opinion, in the near future, only two events are likely to affect the pair. The first main event is the meeting of the Bank of England and some fresh news about Biden's $1.9 trillion aid package. Investors will also price in high volatility in the US stock market, political turmoil in the UK (the possible second Independence referendum in Scotland), and the growing number of new coronavirus cases. Nevertheless, the highlight of next week will be the BOA meeting.
Let's start with the February meeting of the Bank of England. Experts are trying to figure out whether the regulator will adopt a negative rate policy. On the one hand, the latest macroeconomic reports in Britain were rather encouraging, reflecting the economic recovery even against the background of quarantine restrictions. For example, not long ago, the country unveiled its inflation data. The overall consumer price index reached 0.3% on a monthly basis, while on an annualized basis, the indicator accelerated to 0.6% from the previous value of 0.3%. Core inflation increased to 1.4%. The producer price index also steamed up.
This week, investors also cheered strong labor market data. The number of applications for unemployment benefits rose by only 7,000, while the forecast value was 48,000. Unemployment went up slightly to 5% in November. Bear in mind that the nationwide lockdown was in effect in the UK from November 5 to December 2. The indicator of the unemployment rate is a rather lagging indicator that from time to time does not reflect the actual situation
Nevertheless, despite the positive dynamics of main indicators, the central bank may still cut the interest rate. The UK is now facing the first negative consequences of Brexit. The country will have to cope with a variety of problems from declining exports to bureaucratic delays. According to local experts, the most difficult situation is among producers and suppliers of fresh fruits, vegetables, and other goods, as well as those enterprises that are engaged in logistics and financial services. According to some analysts, in the coming months, Brexit problems will only worsen as January is usually considered the time of low trading activity. Besides, many firms are now using December inventories, piled up before the end of the Brexit saga. Apparently, in February-March, the volume of trade will increase and the situation on the border customs office will worsen significantly.
In the light of such prospects, as well as the ongoing lockdown, some representatives of the regulator are lobbying for the idea of introducing a negative rate (in particular, Silvana Tenreiro). The chairman of the Central Bank, Andrew Bailey, changed his opinion on this issue several times, doubting whether "the game is worth the candle". He is worried about how this decision will affect the banking sector. In one of his last speeches, he again voiced a controversial position, saying that a negative rate is "a very controversial thing." At the same time, he added that the central bank is scrupulously studying this matter. At the February meeting, the pendulum will swing in one direction: either the regulator will cut the rate or it will take a wait-and-see approach with a possible expansion of QE. The fate of the pound sterling will depend on this decision.
The US currency is vulnerable to changes in the stock market, which this week sets the tone for trading, determining the risk sentiment. When the key IS stock indexes dived down against the background of negative earnings repors and the pessimism of the head of the Federal Reserve, the US dollar as a safe-haven currency was in high demand. Thus, when the stock market showed a positive trend, the greenback resumed the downward movement. Notably, next week the lower house of Congress will consider Biden's $1.9 trillion aid package. The House of Representatives is highly likely to overwhelmingly support the bill, sending it to the Senate for approval. So, this news boosts optimist in the market. Yet, this is rather bearish for the US dollar.
Thus, in the medium term, the GBP/USD pair will continue to fluctuate in the 100-pip range of 1.3640-1.3740 in anticipation of the drivers. Following the results of the February meeting of the Bank of England, the pair is likely to change its trajectory. The price movement will depend on the decision of the regulator regarding the negative rate. Therefore, over the next few days, it is recommended to open long deals on the pair when it decreases to the levels of 1.3640. Short deals should be opened if it rises to the levels of 1.3740-1.3750.
