GBP/USD. The northern trend is in full swing, but long positions are risky
June 19, 2023 7:23 pm
The pound is on the brink of important events. On Wednesday, June 21, key inflation data for the UK will be published, followed by the Bank of England’s summary of its latest meeting on Thursday. In anticipation of these challenges, the British currency feels quite spirited: paired with the dollar, the pound is testing the resistance level of 1.2810 (the upper Bollinger Bands line on the D1 timeframe), reaching within the 28-figure range for the first time since April 2022. The task for buyers is to establish a foothold above the 1.2800 target, thereby indicating the next target at the 1.2900 level (the lower boundary of the Kumo cloud on the timeframe). However, further northward conquests appear rather uncertain at the moment, as preliminary estimates suggest that inflation indicators will reflect a slowdown in inflation, and the Bank of England’s rhetoric will take on a “conclusive” character.
CPI and the pound
Let’s start with inflation. According to forecasts, the overall consumer price index is expected to decrease sharply in May every month, from the April value of 1.2% to 0.4%. A descending trend is also expected in the year-on-year dynamics, reaching 8.4% y/y (compared to the April value of 8.7%), representing the slowest growth since March 2022. The main CPI, excluding energy and food prices, is expected to demonstrate minimal yet descending dynamics, decreasing to 6.7% (from the current value of 6.8%). The retail price index is projected to decrease to 11.3% (from the April value of 11.4%). In addition, experts forecast a sharp decline in the producer price index, from 3.9% to 2.1% y/y.
If the above indicators come out at least in line with the forecasts (not to mention the “red zone”), the pound will come under significant pressure. In such a case, GBP/USD bears may return to the 26-figure base and test the support level of 1.2580 (the Kijun-sen line on the daily chart). After all, a “red-colored” release will reduce the probability of a rate hike at the June meeting, and this fact will exert background pressure on the GBP/USD pair.
On the contrary, if the inflation report turns out better than expected, the likelihood of a 25-point rate hike will reach almost 100%, especially against strong labor market data for the UK published last week.
To briefly recap, contrary to growth forecasts, the unemployment rate decreased to 3.8%, and the number of new unemployment benefit claims plunged into negative territory (registering at -13,000) against an anticipated increase of 22,000. But the most important factor is the growth of the pro-inflationary indicator. Excluding bonuses, average earnings increased by 6.5%, surpassing the forecasted growth of 6.1%. Including bonuses, the figure also surged, reaching 7.2% (against a forecasted growth of 6.9%)—the highest growth rate since July 2021. It is worth noting that just a few days before this release, Bank of England representative Catherine Mann stated that further wage growth “will become a problem for returning the CPI to the target level.”
In anticipation of the June meeting
I want to remind you that the rhetoric of the accompanying statement of the Bank of England in May had a “conclusive” character. Following the previous meeting, the central bank voiced contradictory signals, indicating it would further tighten monetary policy if inflation gains momentum. In this context, the abovementioned inflation takes on special significance, especially since two out of the nine members of the Monetary Policy Committee have been voting against a rate hike for several consecutive meetings. If the CPI growth report comes out in the “red zone,” some “centrists” may join them. In such a case, the pound will come under strong pressure, even if the bank eventually raises rates at the June meeting.
Thus, the British currency is currently on the brink of important tests. The situation is further complicated because the greenback is also awaiting a significant event: Federal Reserve Chairman Jerome Powell will deliver a report to the US Congress (on Wednesday in the House of Representatives and Thursday in the Senate). Depending on the outcome of this speech, the dollar may either weaken, allowing GBP/USD to consolidate around the 28-figure range, or strengthen across the market.
Conclusions
Given such uncertainty, adopting a wait-and-see position on the GBP/USD pair is currently advisable. As we can see, buyers of the pair have yet to decisively overcome the resistance level of 1.2810 (the upper Bollinger Bands line on the daily chart), indicating the risky nature of long positions. On the other hand, there are currently no grounds for a trend reversal. The fate of GBP/USD (at least in the medium term) will be determined in the coming days.
The material has been provided by InstaForex Company – www.instaforex.com
The pound is on the brink of important events. On Wednesday, June 21, key inflation data for the UK will be published, followed by the Bank of England’s summary of its latest meeting on Thursday. In anticipation of these challenges, the British currency feels quite spirited: paired with the dollar, the pound is testing the resistance level of 1.2810 (the upper Bollinger Bands line on the D1 timeframe), reaching within the 28-figure range for the first time since April 2022. The task for buyers is to establish a foothold above the 1.2800 target, thereby indicating the next target at the 1.2900 level (the lower boundary of the Kumo cloud on the timeframe). However, further northward conquests appear rather uncertain at the moment, as preliminary estimates suggest that inflation indicators will reflect a slowdown in inflation, and the Bank of England’s rhetoric will take on a “conclusive” character.
CPI and the pound
Let’s start with inflation. According to forecasts, the overall consumer price index is expected to decrease sharply in May every month, from the April value of 1.2% to 0.4%. A descending trend is also expected in the year-on-year dynamics, reaching 8.4% y/y (compared to the April value of 8.7%), representing the slowest growth since March 2022. The main CPI, excluding energy and food prices, is expected to demonstrate minimal yet descending dynamics, decreasing to 6.7% (from the current value of 6.8%). The retail price index is projected to decrease to 11.3% (from the April value of 11.4%). In addition, experts forecast a sharp decline in the producer price index, from 3.9% to 2.1% y/y.
If the above indicators come out at least in line with the forecasts (not to mention the “red zone”), the pound will come under significant pressure. In such a case, GBP/USD bears may return to the 26-figure base and test the support level of 1.2580 (the Kijun-sen line on the daily chart). After all, a “red-colored” release will reduce the probability of a rate hike at the June meeting, and this fact will exert background pressure on the GBP/USD pair.
On the contrary, if the inflation report turns out better than expected, the likelihood of a 25-point rate hike will reach almost 100%, especially against strong labor market data for the UK published last week.
To briefly recap, contrary to growth forecasts, the unemployment rate decreased to 3.8%, and the number of new unemployment benefit claims plunged into negative territory (registering at -13,000) against an anticipated increase of 22,000. But the most important factor is the growth of the pro-inflationary indicator. Excluding bonuses, average earnings increased by 6.5%, surpassing the forecasted growth of 6.1%. Including bonuses, the figure also surged, reaching 7.2% (against a forecasted growth of 6.9%)—the highest growth rate since July 2021. It is worth noting that just a few days before this release, Bank of England representative Catherine Mann stated that further wage growth “will become a problem for returning the CPI to the target level.”
In anticipation of the June meeting
I want to remind you that the rhetoric of the accompanying statement of the Bank of England in May had a “conclusive” character. Following the previous meeting, the central bank voiced contradictory signals, indicating it would further tighten monetary policy if inflation gains momentum. In this context, the abovementioned inflation takes on special significance, especially since two out of the nine members of the Monetary Policy Committee have been voting against a rate hike for several consecutive meetings. If the CPI growth report comes out in the “red zone,” some “centrists” may join them. In such a case, the pound will come under strong pressure, even if the bank eventually raises rates at the June meeting.
Thus, the British currency is currently on the brink of important tests. The situation is further complicated because the greenback is also awaiting a significant event: Federal Reserve Chairman Jerome Powell will deliver a report to the US Congress (on Wednesday in the House of Representatives and Thursday in the Senate). Depending on the outcome of this speech, the dollar may either weaken, allowing GBP/USD to consolidate around the 28-figure range, or strengthen across the market.
Conclusions
Given such uncertainty, adopting a wait-and-see position on the GBP/USD pair is currently advisable. As we can see, buyers of the pair have yet to decisively overcome the resistance level of 1.2810 (the upper Bollinger Bands line on the daily chart), indicating the risky nature of long positions. On the other hand, there are currently no grounds for a trend reversal. The fate of GBP/USD (at least in the medium term) will be determined in the coming days.
The material has been provided by InstaForex Company – www.instaforex.com
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