British inflation on Wednesday was a pleasant surprise for traders of GBP/USD. The main reports were released in the green zone, contrary to the pessimistic forecasts of most experts. This fact allowed the pound to stay within the 32nd figure, although the matter with Brexit continues to put pressure on the pair's traders. Still, the fact remains that key macroeconomic indicators are holding up despite the second wave of coronavirus in the UK.
The overall consumer price index on a monthly basis fell to zero instead of the predicted decline to -0.1%. On the one hand, this is a dubious achievement, since inflation has slowed down. But, on the other hand, the component remained in positive territory, contrary to the opposite forecasts. In annual terms, the indicator has been growing for the second month in a row – if at the end of the summer it was at the level of 0.2%, on Wednesday it came out at the level of 0.7%. The core consumer price index (excluding volatile energy and food prices) jumped to 1.5%, although it was forecast to remain at the same level of 1.3%. This is the best result since July of this year. It should be noted that even before the "coronavirus crisis", the core index fluctuated in the range of 1.4% -1.7%.
Other inflationary components also came out in the green zone, exceeding the forecast values. For example, the retail price index, which measures the level of inflationary pressure in retail industries, rose to 1.3% y/y (a three-month high). The producer purchasing price index showed similar dynamics, and its growth may be an early indication of increased inflationary pressure. It rose 0.2% (in monthly terms), with a forecast of a decline to zero. The producer price index added to the positive picture which also came out higher than the forecast values. The UK residential property price index also showed record growth on Wednesday: in September, this indicator increased by 4.7% (in annual terms). This is the maximum of the current year.
In other words, the negative forecasts of most experts were absolutely not justified. Despite the spread of coronavirus, signs of which were already recorded in early autumn in different regions of the UK, the British continued to show consumer activity, thereby reviving the country's economy.
This fact allowed buyers of the GBP/USD pair to keep the pound within the 32nd figure. But a powerful counterweight was Brexit. The next round of negotiations is currently taking place in Brussels, which is already in its second week. The deadline for these negotiations was set for November 15. Then the parties took a few more days and promised to complete the dialogue before November 18. But the negotiators did not meet this deadline either. At the same time, an information vacuum remains around the negotiation process, and this fact makes investors nervous.
The market is divided into optimists and pessimists. Some argue that "silence on the air" indicates progress in negotiations, while their opponents urge to prepare for the worst-case scenario. In particular, Belgium, the Netherlands, and France expressed their concern. According to the Times, representatives of these countries have asked the European Commission to publish a plan of action in case of rejection of the trade deal between the EU and the UK. This news had a negative impact on the position of the pound sterling: the market was again nervous about the outcome of key negotiations that should have ended a few days ago.
On the other hand, on November 15, the head of the British delegation, David Frost, said on his Twitter page that London and Brussels had managed to make some progress in negotiations on the future relationship, but significant differences still remain, and the risk of no deal is real. He added that most of the jointly developed text of the treaty is ready, but significant parts of it have not yet been agreed upon.
Whether the parties were able to find a common denominator on the remaining disputed points of the trade deal is an open question. But we may hear the answer to this question on Friday, November 20. According to Reuters, whose journalists refer to their diplomatic sources, EU negotiators plan to hold a joint closed briefing for EU ambassadors on Friday, during which they will inform about the progress of the negotiations. And although the briefing itself will be closed to the press, the relevant information will probably spread through the media. However, as noted by Reuters, the meeting itself is still in question: everything will depend on what the negotiating groups come to before Friday.
Thus, increased volatility for the GBP/USD pair may provoke on Thursday. If the briefing is canceled, the pound will definitely collapse down the entire market. If the meeting does take place, then everything will depend on the rhetoric of the negotiators. That is, in this case, the chances of a rise or fall of the pound sterling will be equal.
In the face of such uncertainty, it is risky to trade the GBP/USD pair now. Information about the cancellation of the briefing may slip in the media, and this fact will put strong pressure on the pair. However, if the parties confirm the viability of the deal on Friday, the pound may jump impulsively, at least to the level of 1.3330 (the upper line of the Bollinger Bands on the daily chart). The main goal of the upward movement, in this case, will be 1.3400 (this is the upper line of this indicator on the weekly chart).