Pound fled from politics 12.12.2017

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A busy economic calendar and the departure of political risks into obscurity allows us to hope for the return of investors in actively trading the pound. Semiannual negotiations between London and Brussels, judging by the statements of the latter, were completed successfully, which makes it necessary to shift attention to macroeconomic data. In general, there is plenty of data at the beginning of the second week of the month for the UK. Inflation, the labor market, retail sales and the meeting of the Bank of England will satisfy even the highest demands of trade analysts on the news.

The fall of sterling in response to positive news from the negotiation table on Brexit has become a classic example of the implementation of the principle of “buy on the rumor, sell on the facts.” Traders sold the GBP/USD quotes on the factor of harmonizing the conditions of the divorce between Britain and the EU, and the message that the round-the-clock work was over and the issue of the Irish border was resolved. This launched a wave of selling against the backdrop of profit taking. Moreover, popular media referring to competent sources reported that the trade deal before the spring of 2018 will not be achieved. However, the bridgehead is laid, and the bulls on sterling, including Nomura and ING, believe that the reduction of political risks of the UK will push the GBP/USD pair in the direction of 1.4 in 2018 and 1.36 in the near future.

On the contrary, “bears” criticize the agreement that was reached, blaming it for lack of details, and referred to the futures market, where the value of options to sell sterling is higher than the purchase. Derivatives are used for risk insurance, and the current dynamics of an indicator such as the risk of reversal (the ratio of premiums on call and put), indicates that investors still fear the sterling’s collapse.

Dynamics of the ratio of premiums on options

Exchange Rates 12.12.2017 analysis

Source: Bloomberg.

On the other hand, speculators in the futures market held a net long position on the pound for 6 of the last 10 weeks, although before that they acted as net sellers for 98 five-day consecutive days.

Lately, there have been too many news with political coloring, and it’s time for the sterling to turn its focus on the economy. In general, the outlook for upcoming releases is moderately positive. Bloomberg experts do not expect inflation to exceed the critical level of 3%, while the acceleration of average wages from 2.2% to 2.5% y/y. In addition to that, the exit from the negative territory of retail sales inspires optimism for bulls in the GBP/USD pair. Moreover, it is beneficial for the Bank of England to maintain a strong pound with the help of “hawkish” rhetoric, and the dollar cannot take advantage of strong data on the US.

It is possible that the growth of the fiscal deficit as a result of the implementation of the tax reform, the reluctance of Donald Trump to see the US currency strong and the recovery of the economies of the competing countries will force the USD index to restore the downward trend in 2018.

Technically, the GBP/USD pair is preparing to retest the upper bound of the previous consolidation range at 1.304-1.332. Assuming that it, like the previous one, ends with the defeat of the “bears”, the likelihood of a restoration of the uptrend in the sterling will then increase.

GBP/USD, daily chart

Exchange Rates 12.12.2017 analysis

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

Performed by Marek Petkovich,
Analytical expert
InstaForex Group © 2007-2017

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