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The return of investor interest in the US dollar amid unrest in the Capitol, the talks of Donald Trump's impeachment, and weak statistics on the US labor market in December, as well as a clash with the hard reality regarding Brexit, brought GBP/USD quotes below the base of the 35th figure. Yes, London and Brussels managed to strike a deal on a falling flag deal, but leaving the European Union will cost Britain's economy dearly. Moreover, due to the rampant COVID-19, Britain is forced to leave for the third lockdown.
Bank of England Governor Andrew Bailey said a trade deal with the EU would cost the UK around £80 billion. The official referred to the calculations of the Office for Budget Responsibility (OBR), according to which, British GDP will lose about 4% in the long term. Such comments by the head of the regulator forced money markets to increase the likelihood of the BoE's imminent introduction of negative interest rates. Investors believe that this will happen in March. Morgan Stanley predicts that the Central Bank will cut the repo rate from 0.1% to 0% in February, MUFG expects a deeper cut, to -0.15% at the end of winter.
Money Market Repo Rate Expectations
With trade wars and Brexit gone from the limelight, and the pandemic likely to do so in 2021, markets will return to their normal state. And in such conditions, monetary policy is a key factor in the exchange rate formation on Forex. In this regard, the intention of the Fed to hold rates and the Bank of England to reduce them should play into the hands of the "bears" on GBP/USD. Moreover, sterling's troubles do not end with the third lockdown, according to Bloomberg estimates, Britain's GDP may fall by 4.5% in the first quarter after a 1% decline in the fourth, there are also rumors about a reduction in the repo rate.
A trade deal with the EU regulates access to the Single Market only for British goods, while services, which make up about 80% of the economy, will face serious problems due to the severing ties. In addition, Scotland, dissatisfied with London's policy on COVID-19, threatens to secede from the United Kingdom. The independence referendum will increase political risks and put pressure on the pound.
The reanimation of the US dollar was not at all included in the plans of the "bulls" for GBP/USD. The first decline in employment for the entire agricultural sector since the outbreak of the pandemic that swept the US in the spring was an unpleasant surprise for fans of risky assets. The increase in demand for safe-haven assets, primarily for the US dollar, was another reason for the fall in the quotes of the analyzed pair. Now investors are concerned about what is more important: the problems of Britain or the recovery of the downward trend in the USD index? In my opinion, the pound may go into consolidation in the range of $1.33-1.375. At the same time, its fall to the lower border area should be used for purchases.
Technically, the target of 161.8% for the pattern of harmonious trading AB=CD (it corresponds to the area of 1.397-1.4) by "bulls" on GBP/USD has not yet been fulfilled, and in such conditions, pullbacks can serve as a reason for the formation of long positions.
GBP/USD daily chart
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