FX.co ★ The pound will find a way out

The pound will find a way out

The expansion of the fiscal stimulus by the British Treasury and the hope of an agreement between London and Brussels on a falling flag allowed the "bulls" on GBP/USD to go on the counterattack. The pair reached the target set in the previous article at 1.27, after which the initiative passed to buyers. Their actions seem almost a feat against the background of the US dollar strengthening against the main world currencies.

The main drivers of the fall of GBP/USD to the 2-month bottom area were the legislation on the internal market developed by the government of Boris Johnson, which violates some of the points of last year's agreement with the EU; rumors about the introduction of negative rates by the Bank of England; uncertainty that Rishi Sunak will decide to extend unemployment assistance programs; high demand for safe-haven assets due to the deterioration of global risk appetite; and finally, the second wave of COVID-19 in the Foggy Albion. Some of the existing problems remain unresolved, however, the progress on a number of issues allowed the GBP/USD to return above the base of the 29th figure.

I don't think the bulls' key trump card is the new financial aid package. In fact, according to Goldman Sachs, it could put another 2.2 million people out of work and push unemployment up to 9%, which is twice its current level. Rishi Sunak warned that the government will only support viable employment. In accordance with the terms of the program, the employer has the right to dismiss an employee or pay 55% of his salary if he performs his functions during the third part of the working day. The state allocates 22%, the loss of specialists is 23%.

Structure of the job retention assistance program


Andrew Bailey's speech that negative interest rates are in the Bank of England's arsenal did not help the pound much, however, the question of using them is not worth it. The BoE is not a one-man theater, and MPC member Silvana Tenreyro's words that banks have adapted to negative rates in other countries suggest that the discussion is not over yet.

In my opinion, the catalyst for the GBP/USD rally was the information that London and Brussels will be able to agree on an orderly Brexit on a falling flag. The parties have only a week left, and the draft agreement should be submitted to the EU summit in mid-October. Until then, the process of working out the details of the agreement will continue.

After the British government submitted a document on the domestic market that violates part of last year's agreements with the EU, it would seem that an orderly Brexit has ended, which predetermined the rapid fall of the pound. However, according to a Bloomberg insider, the EU will restrain itself and continue negotiations. Boris Johnson will be under pressure to withdraw controversial provisions of the legislation on the domestic market of the Foggy Albion. It seems that the risky game of the British Prime Minister may bear fruit, which allows us to make a recommendation to buy GBP/USD on the breakout of the resistances at 1.29 and 1.295.

GBP/USD, the daily chart

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*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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