The British pound started the year very poorly. The uncertainty surrounding Brexit, the disappointing statistics on Albion, and the "pigeon" rhetoric of the Bank of England representatives, which did not disappear after Boris Johnson's intentions to limit the period of the transition period, led GBP/USD's quotes below the psychologically important mark of 1.3. We can say that while the British currency does not meet expectations, according to the consensus assessment of Reuters experts, pound should be worth $1.32 by the end of January, and $1.35 by the end of the year. Dashing trouble began however!
While experts are betting on clarifying the situation around the divorce of Britain and EU, the differential in interest rates, the growth of external demands under the influence of the end of the US-China trade war and the Bank of England's reluctance in making changes in the monetary policy, the topic of the British pound's weakening is on the table at the MPC. According to outgoing Central Bank Governor Mark Carney, this issue is being discussed, and the regulator is ready to act to support the economy. Moreso, its Arsenal is wide. Along with a reduction in the REPO rate from its current value of 0.75%, the Bank of England has the option to buy bonds worth £60bn, which is equivalent to a 100P reduction in the rate.
Silvana Tenreiro, a member of the monetary policy committee, said that if economic growth did not accelerate in the coming months, she would be inclined to loosen monetary policy. In this regard, a 0.1% reduction in Albion's GDP in November was the catalyst for the GBP/USD peak. In order to reach positive figures for the fourth quarter, the economy should expand by 0.1-0.2% in December. Brexit is expensive for Britain. According to Bloomberg's calculations, its cost from 2016 is about £130 billion, and in 2020, it could increase by another £70 billion.
The dynamics of Britain's spending on Brexit:
Mark Carney and Silvana Tenreiro's "pigeon" rhetoric is extremely dangerous for the pound, as there are already four supporters of the REPO rate reduction. Before that, Gertjan Vliege and Jonathan Haskel had spoken in favor of easing monetary policy. At any time, another MPC member may join them, and the issue of monetary expansion will be resolved. The futures market increased its chances from 30% to 60% in May.
Pound, unlike in 2019, began to respond to economic events and the changes in the outlook of the Bank of England. It makes us take a closer look on the week of January 17. The releases of data on inflation and retail trade make the pound a candidate for the role of the most interesting currency of the five-day period. No wonder that Mark Carney, in his last speech, linked the sluggish growth on consumer prices with the possibility of lowering the REPO rate.
Technically, the break through of the support at 1.29-1.292 (Pivot levels) and the exit of GBP/USD quotes outside the descending trading channel increase the risks of implementing the target by 127.2% on the "Perfect butterfly" pattern. On the contrary though, if the bulls manage to hold the above levels and return the pair above 1.302 and 1.311, the hope of restoring the upward trend will return to them.
GBP / USD daily chart: