The pound continues to receive support from the fundamental background. Data on the growth of Britain's GDP, industrial production, as well as labor market indicators unexpectedly came out in the "green zone", exceeding forecast values. Although Brexit's prospects are still of primary importance for the British currency, traders of the GBP/USD pair could not ignore the above releases. Recently, macroeconomic statistics in the UK have not pleased investors: on the contrary, during the summer, analysts seriously talked about the risks of recession, given the series of negative releases, ranging from PMI indices to June data on economic growth in the country. Therefore, now that the indicators have come out "better than expected", the pound has taken off, especially against the backdrop of a series of defeats of Prime Minister Johnson in the House of Commons.
The pound updates its weekly and 1-a month high against the dollar today. The above combination of fundamental factors made it possible for the bulls to develop corrective growth, which, it would seem, was "doomed" after harsh statements by EU representatives. But due to the positive of recent days, the demand for the sterling has increased again. Thus, according to the latest data, the volume of British GDP on a monthly basis increased by 0.3% in July against the forecast of -0.1% and after falling to zero in June. The services sector made the strongest contribution to the growth of this indicator - this sector of the economy showed the strongest growth over the past 8 months. The volume of industrial growth also pleased investors: the indicator grew by 0.1%, while most analysts were confident that it would remain in the negative area.
The data on the labor market in Britain today only secured success. The unemployment rate unexpectedly dropped to 3.8% (although many were confident that it would remain at the previous level of 3.9%), but the average earnings jumped immediately to 4% (including premiums) and 3.8% (excluding bonuses). These indicators have shown consistent positive dynamics since the spring of this year, and last month the indicator without bonuses was at its highest since June 2008 (this month the indicator fell only 0.1% of the highest value). All this suggests that the price pressure on the part of salaries is increasing, and this fact will have a beneficial effect on inflationary growth in the future.
Thus, if it were not for the "Brexit factor," traders could count on a tightening of the rhetoric of the English regulators' representatives, indicating a possible increase in the interest rate in the first half of next year. But Mark Carney is still focused on the consequences of the "divorce proceedings". Today, the head of the Bank of England said that the financial system of Britain is ready for Brexit, "in whatever form it occurs." But at the same time, he noted that in the case of a "hard" scenario, changes will occur in one moment, so the regulator will have to "adapt to dynamic changes." Carney did not talk about the prospects of monetary policy in plain text, only noting that the central bank is unlikely to use negative rates as a defense tool.
Given the voiced position of the head of the Bank of England, it is worth recognizing that, despite the good data on the growth of key economic indicators, the focus of attention of the regulators' members is still on Brexit. I note that yesterday Boris Johnson suffered another debacle in the House of Commons: MPs refused to hold early elections in October. Now, the head of government will not be able to strengthen his position in Parliament and cancel the law, which actually binds his hands, until October 31. However, the risk of implementing a hard Brexit still remains.
Let me remind you that the French foreign minister recently announced that Paris will not support the extension of the Brexit negotiation process after December 31. Later, a similar position was expressed by Holland and some politicians of other EU countries. France even threatened to veto the decision to postpone if London "does not substantiate its request in detail". In turn, Johnson is not only not going to ask Brussels about this, but also intends to "strongly recommend" his European colleagues not to take such steps.
Thus, the British prime minister plans to bypass the law adopted last week, which obliges him to agree to the granted delay. According to Johnson, he will not violate the prescriptive norms if he simultaneously sends two letters to the EU leadership: one asking for a delay (as required by law), and the other with the opposite request (as deputies did not directly forbid him to take such steps). Another scenario being discussed on Downing Street involves litigation. According to some analysts, Johnson may challenge this law in court. Or he can be challenged by those Conservative deputies who voted against him in the House of Commons.
As soon as Boris Johnson starts implementing one of the above scenarios, the pound will be under significant pressure (having returned paired with the dollar to the area of 21-22 figures). But so far, the market is living with hopes. Brexit negotiator David Frost today went to Brussels, where he will hold talks with EU representatives until the end of the week. The market is still hoping that Britain and the EU will find a common denominator (primarily on the issue of back-stop) by closing a historic deal at the October 18 summit. Although, in my opinion, this scenario is highly unlikely, given the background of this issue.
From a technical point of view, the pair has the potential for further correctional growth to the level of 1.2430 (the upper boundary of the Kumo cloud on the daily chart). The next resistance level is the price of 1.2520 (the middle line of the Bollinger Bands indicator on the weekly chart), but this price target will be available only if one of the top EU politicians hints at progress in the negotiations. The support level remains at 1.2180 - at this price point, the middle line of the Bollinger Bands indicator coincides with the Kijun-sen line (on D1).
