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13.08.2019 12:42 AM
Pound throws a towel into the ring

Perhaps there is no more distressed currency on the forex market than the British pound. Strong statistics and the "hawkish" rhetoric of the Bank of England somehow kept it afloat, however, as soon as the indicators began to deteriorate, the unfavorable political landscape did its job - the sterling went down. The first slowdown in Great Britain's GDP over the past 7 years has sent GBP / USD quotes to the lowest level since the flash accident that took place in October 2016. If we exclude it, the pair went to the very bottom since the 80s.

Since the beginning of the year, the pound has lost about 5.5% against the US dollar (the worst result among the G10 currencies excluding the Swedish krona) and it fell by more than 7% over the past three months. Markets until recently relied on an orderly Brexit, but the coming to power of Boris Johnson made it clear that the chances of Britain's exit from the EU without signing the agreement is clearly understated. Sterling's volatility jumped sharply, and it collapsed into the abyss.

Pound Volatility Dynamics

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It's one thing when investors just talk about the $1.17 mark (Reuters analyst consensus forecast), $1.1 mark (Bloomberg analyst consensus estimate) or parity (Morgan Stanley and BlackRock forecast), while it's another thing when the economy begins to respond to uncertainty and high political risks. The slowdown in Britain's GDP from +0.5% to -0.2% q/q no longer allows the Bank of England to talk about raising the repo rate. One of the pessimistic scenarios is beginning to come true, which does not exclude the sterling's fall to parity against the US dollar.

The first contraction in Great Britain's economy since 2012 leads to sad arguments. Not only does it feel pain from Brexit, but Donald Trump's protectionism policy and the associated slowdown in international trade and foreign demand also make the British tighten their belts. The pound cannot help but respond to a combination of an unfavorable political background and worsening macroeconomic statistics. In this regard, the release of data on the labor market, inflation and retail sales can be a serious test for bulls on GBP/USD. As unemployment grows, consumer prices and retail sales will slow down, as the next wave of sales will cover sterling.

A strong US dollar can add fuel to the fire. Yes, Donald Trump calls on the Fed to lower the federal funds rate, but he does not consider the devaluation of the US currency necessary. The US economy remains stable even against the backdrop of an escalation of trade frictions, and if it continues to do so, competitors will have a hard dollar. It is another matter if the Fed nevertheless follows the White House's lead and by the end of 2019 loosens the monetary policy at all the remaining FOMC meetings.

Technically, on the monthly GBP/USD chart, it is clearly visible that in case of updating the lowest marks from October 2016, the lower and higher AB = CD patterns will be activated. Their targets are 200% and 161.8% consistent with marks 1,135 and 1,037.

Marek Petkovich,
Analytical expert of InstaForex
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