The GBP/USD currency pair on Tuesday, unlike the EUR/USD pair, showed a drop. There were several reasons for this. First, weak macroeconomic statistics from the UK. Second is the terrifying rhetoric of the head of the Bank of England, Andrew Bailey. Third, there are strong doubts about whether the British regulator will raise the rate at least once more in 2022. Fourth, record inflation in the UK is even higher than in the US. We will analyze these points a little below, but for now, we will consider the technical picture. At the moment, the pound continues to be located above the moving average line, so the upward trend continues. Both linear regression channels continue to be directed downwards, so a downward trend remains in the longer term. One very important difference between the euro and the pound: the euro currency managed to update its last local maximum, but the pound sterling did not. The Murray level "7/8"-1.2634 is located near this maximum and so far the price has not even tried to overcome it. Therefore, the pound now has a higher chance of resuming the fall.
As for the fundamental background, it remains, to put it mildly, not in favor of the pound. If earlier the British government preferred not to comment on the possible consequences of the geopolitical conflict in Eastern Europe, now they have begun to do it almost openly. And the forecasts are disappointing. In addition, London is launching a new series of confrontations with the European Union. It's all about the same "Northern Ireland protocol", the story of which promises to drag on for about the same time as the story of Brexit. London doesn't want to go to extreme measures and apply Article 16 of the Brexit treaty, which allows, in case of force majeure, unilaterally not to fulfill some points of the agreement with the EU. The United States has already warned Britain that the rejection of the "Northern Ireland Protocol'' will significantly complicate negotiations between the countries on a trade deal. Thus, London is now between two fires.
Why can the pound resume fall?
Yesterday, business activity indices in the service and manufacturing sectors were published in the UK. If activity in the manufacturing sector decreased slightly (but still decreased), then in the service sector it fell significantly by the end of May - from 58.2 points to 51.8. Thus, the fall of the pound could have been triggered by this event. Recall that last week's statistics from the UK were pleasing, as in most cases the actual values were better than forecasts. The only thing upsetting is inflation.
There was also a speech by BA Chairman Andrew Bailey, who presented a completely apocalyptic scenario for the British economy, speaking at the Finance Committee of Parliament. He noted that the Bank of England cannot influence the current inflation, because it depends on external factors. The strongest influence on price growth is exerted by the factor of rising energy prices and the factor of rising food prices. Bailey noted that the military conflict in Ukraine is the main cause of high inflation. And the Bank of England cannot influence prices in the world food and energy markets in any way. This is probably why we do not see a slowdown in inflation in Britain, although the regulator has raised the rate four times. This is also why we question the expectations of some experts and officials about a reduction in inflation due to several increases in the key rate. From our point of view, the process of returning inflation to 2% will take a long time and will be very difficult.
It seems that for the reasons stated above, the Bank of England simply does not see the need to continue raising the rate in 2022. Why do this if inflation is still not declining, and the economy may seriously slow down? And this is another factor that can put pressure on the position of the British pound since the Fed very much sees the point in further tightening monetary policy. Well, the last thing I would like to note is that inflation in the UK has already overtaken the American one.
The average volatility of the GBP/USD pair over the last 5 trading days is 135 points. For the pound/dollar pair, this value is "high". On Wednesday, May 25, thus, we expect movement inside the channel, limited by the levels of 1.2381 and 1.2650. The upward reversal of the Heiken Ashi indicator will signal the resumption of the upward movement.
Nearest support levels: S1 – 1.2512 S2 – 1.2451 S3 – 1.2390
Nearest resistance levels: R1 – 1.2573 R2 – 1.2634 R3 – 1.2695
Trading recommendations:
The GBP/USD pair continues to form a new upward trend in the 4-hour timeframe. Thus, at this time, new buy orders with targets of 1.2634 and 1.2695 should be considered in the event of a reversal of the Heiken Ashi indicator or a rebound from the moving average. It will be possible to consider short positions if the price is fixed below the moving average line with targets of 1.2381 and 1.2329.
