On Friday, GBP/USD tried to attack the 23rd figure. The bulls have repeatedly tried to rise above 1.2300 since November 30, but the bears intercepted their initiative each time. On Friday, volatility was much higher: the high was 1.2325, while the low was 1.2207. After an impulse surge, traders failed to keep the price within the 23rd figure, followed by a logical price pullback.
If we look at the pair's weekly chart, we will see that it trades within the limits of the uptrend: a month ago, i.e. early November, the price was in the middle of the 11th figure, whereas now we are speaking about the resistance level of 1.2300. In just four weeks, the bulls impressively passed more than a thousand points up. And they are not going to slow down just yet: the pair can rise to the area of the next price echelon, the limits of which are limited by marks 1.2300-1.2500.
Notably, GBP/USD is rising not only because the dollar is weak, but also because the pound itself is strengthening. In particular, UK fiscal confidence has been restored thanks to the Autumn Budget (Prime Minister Rishi Sunak was able to bring the economic crisis triggered by Liz Truss policies under control quite quickly), and the country's external imbalance is showing some signs of improvement, above all with regard to visible trade - there are signs that the trade balance has started to improve. The recession that is expected next year, according to many analysts, will be long, but shallow.
All these fundamental factors play in favor of the British currency, as well as the general interest in risky assets. Optimism about the possible easing of strict anti-Covid measures in China continues to support the overall positive tone in the markets. And the Bank of England, by and large, acts as the pound's ally. The market has already played back the slowdown of monetary policy tightening, and this factor is no longer sinking the pound, although the dollar, for example, is under considerable pressure for similar reasons.
It is obvious that the vector of GBP/USD price movement depends on the outcome of the December meetings of the Federal Reserve and the BoE. If the Fed implements the "basic" scenario (i.e., slows down the pace of rate hikes, but denies rumors of a possible pause), then traders will shift their focus on the BoE meeting that will be held the next day (December 15).
According to a Reuters poll, the BoE will decide to raise its key interest rate by 50 basis points. This is the opinion of 52 out of 54 respondents, that is, the absolute majority. They also believe that the central bank will reach its peak at 4.25% in Q2 2023. And one more important point: according to the majority of economists surveyed, "the probability that the central bank will raise rates by 75 points is higher than the likelihood of a 25-point increase."
This should be viewed through the prism of the British inflation report, which will be released the day before the BoE meeting. If the report is in the green zone, the pound will receive substantial support.
Let me remind you that last month the overall monthly consumer price index came out at 2.0% with the forecasted growth to 1.7% (and the previous value of 0.5%). On an annualized basis, the index also showed strong growth at 11.1%. This is a multi-year record: it showed the strongest growth rate since 1981. Core inflation showed a similar trend. The core consumer price index jumped to 6.5%. In addition, in October there was a significant increase in the producer price index, both monthly (0.6%) and annual (19.2%). The retail price index jumped by 14% y/y, also in the green zone.
Inflation growth in October was primarily due to the increase in food and energy prices. Gas prices rose by almost 37%, and electricity prices rose by almost 17%. Food and beverage prices rose 2% over the month.
According to preliminary forecasts, the overall U.K. consumer price index will show the first signs of slowing in November, falling to 10.9%. The core CPI should remain at October levels (6.5%). If, contrary to forecasts, British inflation does not show signs of slowing, the pound will be in high demand in the run-up to the BoE's December meeting. Certain indirect signals (energy crisis, current rise in food prices etc.) suggest that it may surprise with its "green color".
Thus, in my opinion, the pound may strengthen next week, thereby, increasing the pressure on the greenback within the uptrend. Therefore, long positions are a must. The first, and so far the main target is located at 1.2360 (semi-annual price high).
