The greenback again showed its character at the start of the trading week, following the yield of treasuries. The US dollar index again tested the 104th figure, and the yield on 10-year government bonds reached 3.199%. The strengthening of the US currency affected all pairs of the "major group". And the GBP/USD pair was no exception here: the pound updated another price low today, falling to the middle of the 22nd figure.
The pair has been actively declining for the fourth consecutive week, and to be more precise, since April 18. In less than a month, the GBP/USD bears won back almost 800 points - the price plunged from the 30th figure. Corrective upward pullbacks (sometimes quite large) made it possible for traders to open short positions at a better price. The Bank of England (BoE) did not help the pound either, which consistently raises the interest rate, or by a record rise in inflation in the UK. All these fundamental factors were perceived in the opposite way, through the prism of the unexpected indecisiveness of the British central bank. Increasingly, there are theses that the central bank will soon take a break in the process of tightening monetary policy, fearing a further decline in the country's economy. The BoE's May meeting was indicative in this respect. It was after the announcement of the results of this meeting that the GBP/USD pair resumed the downward trend, falling by more than 300 points in just two days. The doubts of the English central bank against the backdrop of the Federal Reserve's resolute position are pushing the pair down to new price lows.
Let me remind you that at the May meeting, members of the BoE sharply worsened their macroeconomic forecasts. For example, in 2023, the central bank expects the economy to contract by 0.25%, while previously it was expected to grow by 1.25%. In 2024, according to the updated forecast, the volume of GDP will increase by 0.25%, while earlier forecasts spoke of growth by 1%. At the same time, the central bank significantly raised the estimate for inflation in the UK in 2022 (to a 40-year high - from 5.75% to 10.25%).
In other words, the risks of stagflation are growing, acquiring quite specific outlines.
At the final press conference, BoE Governor Andrew Bailey criticized those hawks who call on the central bank to take more active steps to tighten monetary policy. He made it clear that the process of raising the interest rate has a downside, a negative side, which must also be taken into account. By the way, according to Reuters, two members of the Committee during the meeting expressed doubts that the rate should be raised at the May meeting. In their opinion, the central bank "has already done enough", so it is necessary to wait for the effect of the measures already taken. And although the de facto decision on the rate was adopted unanimously, this is not the first time that members of the central bank have demonstrated such an attitude. Earlier, Jon Cunliffe openly called for a pause - he voted at the previous meeting against the increase in the rate.
Hugh Pill, Chief Economist of the BoE, added fuel to the fire the day before yesterday. He stated that the central bank "should not overreact to short-term events" and should not be "overly aggressive" in its policies.
In other words, against the background of such a cautious and indecisive position of the BoE, as well as against the background of growing risks of stagflation, the pound began to lose its appeal. According to a number of experts (in particular, the Canadian TD Securities), the central bank will raise the interest rate in June, and possibly in August, after which it will take a wait-and-see attitude. Hugh Pill's latest comments "cemented" this version, putting more pressure on the British currency.
That is, now we can talk about the divergence of the rates of the BoE and the Federal Reserve, whose representatives are still determined and even aggressive in the context of further steps to tighten monetary policy. The likelihood of a 50-point Fed rate hike in June increased after the release of the latest Nonfarm report. If US inflation does not turn out to be disappointing on Wednesday, then in this case it will be possible to count on a 50-point increase following the results of the July meeting. Also, the market will again talk about the likelihood of a 75-point move, although, in my opinion, this scenario is unlikely. But here even relevant rumors will push the dollar up.
Thus, hawkish expectations about the Fed's further actions and disappointing signals from the BoE allow the GBP/USD bears to conquer more and more price territories. The downward trend has clearly not exhausted itself. Moreover, if the US inflation report that is set to be released on Wednesday turns out to be in the green zone, the bears may well approach the bottom of the 22nd figure.
The technical picture also speaks about the priority of short positions on the GBP/USD pair. In particular, the Ichimoku indicator on the H4, D1 and W1 charts has formed a bearish Parade of Lines signal. Also, the price on all higher timeframes is located either on the lower or between the middle and lower lines of the Bollinger Bands indicator, which is located in the extended channel. The trend indicators are confirmed by the MACD oscillator, which is in the overbought area. The support level (target of the downward movement) is the lower line of the Bollinger Bands indicator on the daily chart, which corresponds to the price of 1.2220. In this price area, it would be advisable to take profits and take a wait-and-see position.
