08.02.202113:36 Forex Analysis & Reviews: Sterling enthusiastically embraced Bank of England announcement and reacted strongly to US labor market report

Hope for the best, prepare for the worst. This is the rhetoric that the Bank of England has noted concerning negative interest rates. The regulator stressed that a radical change in monetary policy may not occur, but banks should be prepared for the fall in the repo rate below zero. The market took the announcement with enthusiasm: the yield on British bonds surged upward, the pound strengthened, and the likelihood of monetary expansion by December decreased.

Even though BoE lowered its forecast for the first quarter to -4%, and Andrew Bailey noted that Britain's economy will have a hard time in the short term, investors were enthusiastic about the words of the head of the central bank about the recovery of GDP in the second half of 2021. If all goes according to plan, the need for negative rates will disappear, and GBP/USD will be able to continue the rally with a clear conscience.

Dynamics of the Bank of England's GDP forecasts

The pound is supported by the speed of vaccinations in Britain (according to Bloomberg, 18.8% of the population received vaccinations, compared with 12.8% in the US and 3.8% in the EU), as well as a decrease in the likelihood of a referendum on Scottish independence. Avoiding political risks is an important growth driver for any currency.

The January report on the US labor market contributed to the GBP/USD's rise above the base of the 37th figure. Employment outside the agricultural sector was disappointing, leading Joe Biden to argue that the US economy is still weak and needs more stimulus. As a result, the S&P 500 managed to rewrite all-time highs, risk appetite rose, while the US dollar as a safe-haven asset, on the contrary, weakened.

In my opinion, the correction to the downward trend in the USD index is coming to an end. Yes, the mouse fuss over the impeachment of Trump and Biden's intention to be tough on China support demand for safe assets, and expectations of Treasury auctions are driving up Treasury yields. However, as the experience of January shows, the rates on debt obligations will go down after the placements, and the Senate is unlikely to approve the idea of a vote of no confidence in the 45th US president. The dollar may be beaten until mid-February, but then it will do what it should. It will weaken.

As I noted, the reason for this is likely to be the opening up of the world's major economies after the lockdown. It would be nice if the University of Michigan study on the seasonal nature of COVID-19 turned out to be true. Then for the rapid growth of global GDP and slow vaccination will do. Yes, the United States and China will be at the forefront, but this is the case when a strong economy will lead to a weakening of the national currency. Simply because of the dollar's status as a safe-haven asset.

Technically, nothing has changed dramatically on the daily GBP/USD chart for the past week. An upward trend is stronger than ever, and in such conditions, buying on pullbacks is the best strategy. Support rebounds in the form of moving averages are used, however, a break of resistance at 1.375 can be used to form long positions. The target is 1.4, which is at 161.8% on AB=CD.

GBP/USD, daily chart