20.05.202119:24 Forex Analysis & Reviews: GBP/USD. Strength of the upward trend: buy the pound on downturns

The pound-dollar pair has been besieging the 42nd price level for the second week. GBP/USD traders tried several times to gain a foothold above the 1.4200 mark, but each time they met resistance: buyers took profits and opened short positions, thereby repaying the upward momentum. Yesterday, the pressure on the pair increased after the publication of the minutes of the April Fed meeting. Against the background of the general strengthening of the greenback, the pound retreated from price highs, losing almost 100 points. However, at the base of the 41st figure, the downward momentum similarly faded: despite the activation of dollar bulls, the GBP/USD bears could not develop a downward trend, being satisfied with the 100-point kill. At the moment, buyers have seized the initiative, returning the pair to the borders of the 42nd figure. And apparently, the next assault on the impregnable price barrier will take place very soon, so longs for the pair are still relevant.

On the side of the pound – the "hawkish" position of the Bank of England, the growth of key macroeconomic indicators, and the improving epidemiological situation allow London to relax quarantine restrictions in the country. It is noteworthy that the coronavirus also plays against the sterling. To be more precise, the Indian strain of COVID-19 – because of which the authorities can postpone the almost complete lifting of quarantine restrictions, scheduled for June 21.

On the side of the dollar, there are illusory hopes for an early curtailment of QE and the inflation release published last week, which, in fact, "woke up" dollar bulls. Against the greenback are all other fundamental factors, including a slowdown in the growth of the US labor market, a decline in retail sales, and a decline in industrial production in the United States.

If you weigh all the pros and cons, you can come to a fairly unambiguous conclusion: the strengthening of dollar positions is temporary, so any downward pullback of GBP/USD can be used as an excuse to open longs. The pound has more impressive arguments for its further growth compared to the greenback, which builds castles in the sand.

Let me remind you that the reason for yesterday's strengthening of the dollar was a single phrase in the minutes of the last (April) meeting of the Federal Reserve. The document indicates that "some members of the Committee" said that "at some point" discussion of reducing the pace of asset purchases "will be very appropriate" if the recovery of the US economy continues to gain momentum. Seizing on this phrase, the dollar bulls really built a kind of castle in the sand, coming to an unfounded (in my opinion) conclusion that there was a split in the Fed's camp and the "dovish" position of the Fed is not monolithic.

But, first, this fact was denied by the majority of the 12 members of the open market committee. Commenting on the latest inflation release, they reported that it is still "too early" to talk about curtailing QE. Second, the April meeting was held even before the release of data on the growth of the US labor market and many other macroeconomic reports, which reflected the slowdown in the recovery process. Third, the Fed's minutes speak of the recovery of the US economy as a whole, while only the consumer price index showed a jump in growth (according to many members of the Federal Reserve – due to the low base of last year). By the way, today the Fed-Philadelphia manufacturing index was published, which came out much lower than the forecast value (the indicator fell to 32 points with a forecast of growth to 41 points). For comparison, it can be noted that in April, this indicator came out at the 50-point mark.

In other words, the greenback strengthened its position on very shaky fundamental factors. These factors will definitely not be able to reverse the trend for the GBP/USD pair, which indicates the temporary nature of the downward pullback.

The pound, in turn, received support from the inflation report yesterday. The British consumer price index has been growing consistently (which is important in this context) for three months now. In April, it jumped to 1.5%, while in March it came out at 0.7%. April saw the highest growth rate since March 2020. On a monthly basis, the index also showed positive dynamics, rising to 0.6% (annual maximum). Commenting on yesterday's release, Bank of England Governor Andrew Bailey, said that the regulator will not allow inflation "for a long time" to be above the target level. This is not the first signal of a hawkish nature – just last week, BoE Deputy Governor Ben Broadbent, allowed a gradual tightening of monetary policy "under certain conditions." According to him, for this, the Central Bank needs "clear signs of a steady recovery in inflation towards the target level." These words took on a special meaning after yesterday's inflation release.

Some pressure on the pound was exerted by British Health Minister Matt Hancock, who recently expressed concern about the spread of the Indian strain of COVID-19. In the British press, there was talk that the next stage of easing quarantine restrictions could be postponed from June 21 to August or even September. At the same time, representatives of the leading manufacturers of vaccines assured the public that their drugs cope with the new strain. It should be noted here that, according to the latest data, more than 70% of adults in the UK have already received the first dose of the coronavirus vaccine, and 40% of Britons have already been vaccinated with both injections. Therefore, the "coronavirus factor" is unable to weaken the position of the pound – including in a pair with the dollar.

From the technical point of view, the price on the higher time frames (D1, W1, MN) is either on the upper line of the Bollinger Bands indicator or between the middle and upper lines, which indicates the priority of the upward direction. On the daily and weekly charts, the Ichimoku indicator has formed a bullish "Line Parade" signal when the price is above all the indicator lines, including the Kumo cloud. This signal also indicates a bullish sentiment. The nearest target of the upward movement in the short term is the mark of 1.4200. The next resistance level (and, accordingly, the next target) is the 1.4240 mark – this is the upper line of the Bollinger Bands indicator on D1.