GBP/USD: The pound breaks stereotypes

GBP/USD: The pound breaks stereotypes

27 July 2021, 11:32
Anderson De Carvalho Manilha Braga

The pound is a Forex paradox currency. When the deteriorating epidemiological situation, friction due to Brexit, and the dovish rhetoric of the Bank of England officials force banks and investment companies to issue bearish forecasts, and yesterday's bulls are forced to abandon their positions, the sterling is suddenly marked by a rapid rally. What's this? A "dead cat bounce", which is a well-known formation in technical analysis that assumes the last attack of buyers before throwing the white flag? Or is GBP/USD going to fulfill the Bloomberg consensus forecast?

Economists polled by the mainstream media in June expected the pair to rise to 1.4 by the end of the third quarter, but Bloomberg's option pricing model signals that the likelihood of such an outcome is only 27%. Over the past month, the odds have dropped by 20 p.p. Legal & General Investment Management refuses to bet on EUR/GBP sales, while Allianz Global Investors advises shorting GBP/USD.

There are plenty of reasons for "bearish" views on the analyzed pair. Despite the fact that Britain is one of the leaders in the rate of vaccination (55% of the adult population of the country received both doses), the increase in the number of people infected with COVID-19 from 37,000 a week earlier, to 46,000 leads to sad thoughts about new isolations and a slowing economy. And it should be noted that this is already beginning to happen. The composite Purchasing Managers' Index (PMI) fell from 62.2 to 57.7 in July due to lower consumer demand, supply chain disruptions, and massive staff shortages amid a worsening epidemiological situation.

It is not surprising that in such conditions, the rhetoric of Bank of England officials is beginning to look more and more "dovish". According to Deputy Governor Ben Broadbent, what is happening with inflation now does not give grounds to assume that it will remain at an elevated level in 18-24 months. And this is exactly the horizon that is necessary for making decisions on adjusting monetary policy. Other BoE officials also warn that an excessively rapid withdrawal of monetary stimulus could reverse the recovery of the British economy. In particular, Jonathan Haskel and Catherine Mann talk about this.

If we add Boris Johnson's intention to unilaterally rewrite the Brexit agreement amid the alleged violation of EU inspections in the territorial integrity of the United Kingdom, which can be interpreted as an increase in political risks, the desire to sell the pound looks logical.

Nevertheless, you need to understand that there are always two currencies in any pair. Rumors that the US economy has reached a growth ceiling, and the Fed will return to a policy of patience due to the Delta variant and a series of disappointing reports, put pressure on the US dollar.

Technically, if the bulls manage to push the GBP/USD quotes out of the downward trading channel and storm the resistance at 1.3835, there will be grounds for buying. Until that happens, it makes sense to stick with sales strategies.

Share it with friends: