The currency pair experienced a notable decline on Wednesday, extending a three-day downward trend. While previous days' declines seemed to be driven by technical factors, Wednesday's decline can be attributed to specific reasons, which will be discussed further.
The pound might enter a new decline phase. In recent months, we have repeatedly mentioned that the British currency is considered overbought, often rising without justification. This period seemed to be behind us a month ago, but recent weeks have proven otherwise. The pound's rise can primarily be attributed to market expectations of the Bank of England's interest rate, which has already reached 4.5% and may increase to 4.75% today. However, it is crucial to consider that slowing down the pace of monetary policy tightening to a minimum without intending to conclude the cycle in the coming months serves no purpose. Yesterday's inflation report revealed that the sharp decrease in inflation last month was merely a coincidence. While inflation is gradually declining from its peak of approximately 11%, the decline is slow, excluding the April value.
Thus, Andrew Bailey's forecasts of halving inflation by the end of the year are not coming true. We questioned these forecasts several months ago when the Bank of England's governor mentioned 3.9% inflation by year-end. The pattern is straightforward: if inflation in the UK has risen more than in other countries, it will take longer to return to the target level. Unlike the Federal Reserve, the Bank of England has never stated its intention to raise the rate as needed. Therefore, any subsequent rate hike could be the final one. The UK economy has already experienced zero growth for four quarters, and each subsequent rate increase signals the beginning of a recession.
Another significant factor is the rise in core inflation. As mentioned, the main indicator did not decrease in May, and core inflation demonstrated further acceleration. In this case, the most obvious action for the Bank of England would be to continue raising the rate. Speculation by some experts suggests a possible 0.5% rate hike today, which would be an unexpected decision by the regulator. However, everything will unfold according to plan. Currently, the Bank of England finds itself in a delicate balancing act. If it continues to tighten its policy beyond the planned 4.75%, the British economy will inevitably slide into a recession, exacerbating the challenges the British population faces. It's important to note that many UK residents are dissatisfied with low wage growth amid high inflation, and tightening monetary policy automatically leads to increased unemployment and reduced economic growth.
If inflation is disregarded, what was the purpose of raising the rate to its current levels in the first place? Honestly, the Bank of England's position is quite unenviable, and any subsequent decision it makes will result in negative consequences. The bank must choose between continuing the fight against inflation or prioritizing economic stability. Given the current circumstances, it isn't easy to comprehend how the British currency can remain a growth leader in 2023. While a slight increase wouldn't raise concerns, the pound has gained 2500 points in the past ten months. There is a noticeable lack of downward corrections when observing the 24-hour time frame. The CCI indicator regularly indicates "bearish" divergences, but overall, the upward momentum persists. The pound is overbought, and the market has long factored in the BOE rate hike in June. Consequently, there is potential for movement in any direction today.
Over the past five trading days, the average volatility for the GBP/USD pair has been 96 points, which is considered average for this currency pair. Therefore, on Thursday, June 22, we anticipate movements within the range defined by the levels of 1.2638 and 1.2830. An upward reversal of the Heiken Ashi indicator will signal a resumption of the upward movement.
Nearest support levels:
S1 - 1.2695
S2 - 1.2634
S3 - 1.2573
Nearest resistance levels:
R1 - 1.2756
R2 - 1.2817
R3 - 1.2878
Trading recommendations:
In the 4-hour timeframe, the GBP/USD pair continues to undergo a correction. Currently, long positions with targets at 1.2817 and 1.2830 remain valid, which should be opened if the Heiken Ashi indicator is reversed to the upside or a price rebound from the moving average. Short positions can be considered if the price firmly establishes below the moving average, with targets at 1.2634 and 1.2573.
Explanations for the illustrations:
Linear regression channels - help determine the current trend. If both channels point in the same direction, it indicates a strong trend.
Moving average line (settings 20.0, smoothed) - determines the short-term trend and direction for trading.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the probable price channel in which the pair is expected to trade in the next 24 hours, based on current volatility indicators.
CCI indicator - its entry into the oversold territory (below -250) or overbought territory (above +250) indicates an upcoming trend reversal in the opposite direction.
