The pound was hit hard
The meeting of the ECB ended predictably, as they kept its forecasts almost unchanged, despite a decline in business activity, and as expected, the asset repurchase program will be curtailed by the end of the year.
The ECB believes that some cooling in the economy is a temporary phenomenon, and the main concern is related to the fall in stock markets and the formation of the Italian budget. Meanwhile, the spread between the 10-year bonds of Italy and Germany continues to grow, which gives the right to consider the prospects for the euro to be rather weak.
The EUR/USD pair will remain under pressure and the probability of a decline to 1.1301 remains high. This support is a key level, hence, a struggle for the initiative will take place near this area.
The Brexit question is gradually becoming more and more difficult. As the media recently reported, the Queen of Great Britain commented for the first time publicly on the forthcoming British withdrawal from the EU. Despite reformatting relations, she considers “a long-term union lasting”, she explained.
Journalists have a short memory – they don’t remember that it was Elizabeth II in a throne speech before the country’s parliament that declared on May 27, 2015, that the UK would hold a referendum on leaving the European Union in 2017. The decision on withdrawal was made at the highest level long before the referendum. This political decision is being implemented and discussions in society and the referendum itself were needed only to give the process legitimacy.
Brexit is needed in order to relinquish certain obligations within the EU while retaining trade privileges. As practice shows, such a plan is risky. Russia officially blocked the UK attempt to retain all the conditions of membership in the WTO, which were provided to it as a member of the EU. In fact, we are talking about the need to revise all trade relations with third countries, which is equivalent to several years of intense negotiations.
This situation significantly undermines the position of the UK complicating the task of negotiating with the EU and ultimately will not allow the pound to recover.
The current account of UK is confidently insufficient. Some positive dynamics in the last two years is associated with a strong weakening of the pound, which has improved the trade balance but now there is every reason to assume that the dynamics will again become negative. The Bank of England in the last report on inflation assumed that trade will make a positive contribution to GDP growth in the coming quarters, however, it seems that the process may be reversed.
The Bank of England’s forecast makes a crack, which reduces the likelihood of completion of the asset repurchase program, and the regulator will not be able to follow the Fed to begin to reduce the balance sheet.
The GBP/USD pair is just one step away from 1.2780 support. It is quite possible that it will be broken today with the next target of 1.2660. The chances of a reversal look ghostly, there are no fundamental reasons for growth.