The pound's strong recovery, which we could watch at the beginning of this week, seems to be gone. There are several factors, both fundamental and technical, contributing to this. Among the fundamental ones are the strengthening of the dollar, the growing number of COVID-19 cases in the UK, difficulties in the supply of goods to the country because of Brexit, and the list is not full.
Technically, there is strong resistance in the upward way of the GBP/USD pair. Buyers are very passive before the important 1.3785 level because they are not confident in their strength. This level supported the exchange rate in the middle of the month, but that was it. The further recovery was held back. It seems to be an important and strong barrier, and until sellers take it, further growth is impossible.
In general, the indicators give mixed signals. So, the momentum on the 4-hour chart is bullish, but the pound continues to trade below the 100 and 200-SMA. Support is marked at 1.3725, 1.3695, 1.3670, and further 1.3600. Resistance is at 1.3770, 1.3785, 1.3830, and 1.3895.
What kind of signal is the economy showing to the pound?
The UK economy rebounded in the second quarter with a growth of 22.2% annually and 4.8% quarterly. High mass vaccination pace made the difference. The government called the lockdowns off and allowed tourists to enter the country.
The UK was not ready for such a quick and abrupt comeback. The services and hospitality industry faced a severe labor shortage. Brexit and the usual flow of migrants were not the least of the factors.
An official survey confirmed the lack of workers. More than 40% of entrepreneurs called this shortage the main obstacle to investment in the business. In August, the index tracing outlook for employment crashed to -35% from 38% in May. Business optimism plummeted to -17% from 47%.
What follows is a chain reaction, the pieces are falling one by one. For example, car output fell to its lowest level since 1956. The July index fell by 37.6% compared to the same month last year. The delta variant caused a spike in new cases in the UK, and people once again distrust the healthcare system. The government's response to the epidemic is viewed negatively by 48% of the UK citizens, up from 45% a short time ago.
All we may see right now is an illusion of solved issues. All above, along with the labor shortages, is likely to undermine the pace of recovery of the UK economy. The pound will remain weak again if it does not receive support.
If the Fed Chairman even hints at the imminent withdrawal of stimulus at the symposium at Jackson Hole, the pound will fall without a second thought. However, the closer Powell's speech comes, the more doubts the markets arise. Something makes to wonder that Powell will deliver a lot but nothing on the main issue. The market players will receive no distinct signals about timings of the QE tapering or easy policy continuing. The situation has taken a turn for the worse since the last meeting because of the pandemic. The Fed may want to buy some time before the September meeting. There will be more information by then.
The GBP/USD pair might get lucky if the dollar weakens. It is not certain that it will be a breakthrough growth, but the pound will be able to avoid a deep decline.
