The pound-dollar pair retreated from two-month lows yesterday, impulsively surpassing a 150-point path in just a few hours. If it settled at a 1.3786 low on Friday, then yesterday's high was marked at 1.3936. It is noteworthy that on Monday, the British currency rose in price against the background of an almost empty economic calendar, without any specific information reason. However, there were some reasons for the optimism of GBP/USD traders: some British online media reported that the Bank of England (which will be held the day after tomorrow) will voice a more hawkish position on the prospects for monetary policy at its June meeting. According to an insider of unnamed sources, the British central bank will allegedly allow the option of curtailing the program of buying government bonds for 875 billion pounds after inflation reached its highest level in almost two years.
Despite a fairly strong upward momentum, the GBP/USD bulls were unable to build on the success or at least keep the occupied heights. And today, the bears have seized the initiative for the pair. First, the aforementioned information was not confirmed by such authoritative resources as the Financial Times, Reuters, Bloomberg, WSJ. According to them, the Bank of England will maintain a wait-and-see attitude, and BoE Governor Andrew Bailey will voice a dovish rhetoric, saying that the national economy needs further support.
The only "curtsey" in favor of the hawkish scenario is a possible increase in the number of those who will vote to curtail QE. And here it should be noted that even a minimal strengthening of the hawk wing will support the pound, despite the fact that the majority of representatives of the Bank of England will support the preservation of the status quo. At the May meeting, the chief economist of the British central bank, Andy Haldane, was the only one who voted to stop buying bonds as part of the quantitative easing program in August. According to some analysts, at the June meeting, he will maintain his position, given the fact that inflation in Britain in May for the first time in two years exceeded the target two percent level. Moreover, according to some media reports, Haldane may be supported by some of his colleagues the day after tomorrow – according to one information, it will be John Cunliffe, according to another - Cunliffe and Dave Ramsden.
In general, the British central bank is expected to be more hawkish in the light of recent macroeconomic reports, large-scale vaccination rates and the easing of quarantine. Although not all economic indicators showed growth, overall expectations are optimistic. After all, in addition to the growth of inflation, other key indicators also showed positive dynamics. In particular, according to the latest data, the volume of UK GDP in April this year increased by 2.3% compared to the previous month. The indicator is higher in the green zone: the British economy showed a record growth rate since July last year, ahead of the official forecast. Against the background of the easing of quarantine restrictions, the service sector showed the strongest growth (+3.4%). While in the construction sector, as well as in the industrial sector, negative dynamics were recorded.
There is another fly in the ointment: the May data on retail sales in the UK came out in the red zone - both taking into account fuel costs, and without this component. So, the volume of retail trade, taking into account fuel costs, fell back into negative territory last month – for the first time since January of this year. With a growth forecast of up to 1.6%, the indicator collapsed to -1.4%. A similar situation occurred with the "related" component. Retail sales excluding fuel costs also declined in May (-2.1%), with growth forecast at 1.7%.
Such conflicting fundamental signals suggest that the pound may once again become a victim of inflated expectations, if the Bank of England maintains a dovish position, and the idea of curtailing QE is supported by only one representative of the central bank – Andy Haldane.
For this reason, GBP/USD traders are in no hurry to open large positions now. Both buying and selling look risky, especially in light of Federal Reserve Chairman Jerome Powell's speech to Congress today. There is no consensus among experts and analysts about the impact of this event on the market. According to some currency strategists, Powell will repeat the main theses of the June meeting, providing additional support to the dollar, and, accordingly, to the GBP/USD bears. According to other experts, Powell will voice rather cautious rhetoric before the congressmen, thereby extinguishing the "unnecessary" excitement that has arisen around the greenback. After all, in addition to the hawkish results of the Fed's June meeting, the dollar's position was further strengthened by some representatives of the Fed, who spoke this week. In particular, Bullard called for an interest rate hike as early as next year, and Robert Kaplan said "the danger of too slow action."
Powell will address congressmen at the end of today's US session. Reuters, citing its sources, published abstracts from his speech prepared for this speech. They are rather vague, reflecting the "cautious optimism" that was voiced during his final press conference. There are no time benchmarks, no clear conditions under which the Fed will begin to normalize monetary policy. Obviously, all these nuances will be clarified by representatives of the Congress. And just the answers to these questions can provoke increased volatility. Whether the dollar is in favor or against it is an open question.
Therefore, at the moment, take a wait-and-see position on the GBP/USD pair. If Powell allows the option of curtailing QE within the current year, the dollar will receive significant support. This fact will allow the pair's bears to test the support levels of 1.3850 (the lower line of the Bollinger Bands on the daily chart) and 1.3800. If Powell focuses on the existing risks, GBP/USD bulls will be able to demonstrate corrective growth again, the "ceiling" of which is still marked at 1.3990 (the upper limit of the Kumo cloud, coinciding with the Tenkan-sen line on D1).
The material has been provided by InstaForex Company - www.instaforex.com