FxPro: Nervous silence around the pound

At the end of the week, the British currency will face new challenges: several events at once that could drastically affect the GBP trend.

On Wednesday evening, the Fed’s monetary policy decision will be announced, as well as forecasts for the economy and interest rates. Markets rely heavily on the Fed soft tone. They can expect an unpleasant surprise because retail sales and orders for durable goods have soothed fears of a serious economic slowdown, which the Fed is unlikely to be able to completely ignore. However, it is worth paying attention to the inflation slowdown, which will allow the central bank to remove the issue of raising interest rates from the agenda.

On Thursday, the Bank of England will announce its decision and release a monetary policy summary with Brexit potentially around the corner. Market participants are waiting for a rate increase during the year, but this is an open question. At the same time, the published data showed a small uptick of overall inflation to 1.9% y/y: it is near target levels, which allow the Bank of England to pay less attention to inflation and to focus on the possible consequences of the situation around Brexit.

And now the most potentially explosive topic for the British currency: May is going to discuss in Brussels a short Brexit postponement to finalize the new conditions. Juncker, president of the European Commission, warned that another meeting might be needed next week, where will be discussed the timing of the Brexit postponement. Until now, the big question is who will be stronger: bureaucrats from Brussels or London. At the same time, there is no doubt that both camps are so far succeeded only in one thing: inventing a way to tighten and complicate the whole process.

So far, they are doing it best, and the British currency is enjoying a lull. The emergence of new reasons for the Brexit postponement is favourable for the pound, but the possibility of Brexit without a deal cannot be finally ruled out, which can turn into a sharp GBP decline and a storm on the country’s stock market.

Alexander Kuptsikevich, the FxPro analyst