17.06.202112:59 Forex Analysis & Reviews: The Fed crossed the pound road

The results of the June FOMC meeting became a bucket of cold water not only for the "bulls" on GBP/USD but also for the entire financial market. Stock indexes fell, the yield on 10-year US Treasury bonds soared at the fastest pace in three months, and the pound was hit by a stronger US dollar after the date for the first increase in the federal funds rate shifted from 2024 to 2023. Forecasts do not exclude two acts of monetary restriction of the Federal Reserve over the next 2.5 years.

Jerome Powell and his colleagues did not turn a blind eye to the boom in economic growth and the acceleration of the CPI to 5%. They raised estimates of GDP to 7% and the core index of personal consumption expenditures to 3% in 2021. At the same time, the Fed continues to argue that the acceleration of inflation is temporary – its forecast for PCE for 2022 suggests a slowdown in the indicator to 2.1%. The chairman of the Central Bank emphasized this at a press conference but stressed that officials will react accordingly if prices rise more steadily.

If both the Fed and the Bank of England start raising rates at the same time, what advantage can sterling have over the US dollar? Perhaps the upward movement of GBP/USD has gone too far, and the Fed has reminded investors to be careful. The closing of long positions rose in the break of the lower limit of the trading range of 1.409-1.422, followed by a peak to the middle of the 39th figure.

But the economy of the UK looks no worse than the US. If not better. In May, British companies increased the number of employees by 197,000, which is a new record, unemployment fell to 4.7%, wages grew at the fastest pace since 2007, inflation in May exceeded the Bank of England's target of 2%. The labor market is recovering no slower than the economy, the proportion of vaccinated people in the UK exceeded 52% compared to 48% in the US and 32% in the EU. Why shouldn't the pound strengthen?

Inflation dynamics in Britain

In my opinion, the main reason for the GBP/USD correction is the inflated market expectations about the Fed's passivity. In the run-up to the June FOMC meeting, there were many positions related to the fact that the Fed will ignore the acceleration of inflation and continue to repeat the mantra about the temporary nature of the acceleration in consumer prices. An unpleasant surprise caused sellers of the US dollar to close short positions.

It should be noted that the change in the Fed's rhetoric is not the only problem for the GBP/USD bulls. The EU is threatening Britain with tariffs and quotas for repeated Brexit violations in Northern Ireland, while the opening of the UK economy not on June 21, as previously expected, but on July 19 shifts the timing of its full recovery from the recession to a later period.

Technically, as expected, the combination of the "Three Indians" and "Splash and Shelf" patterns worked on the daily chart of the GBP/USD. At the same time, the breakout of support at 1.4090 allowed the formation of short-term longs. Let's see if the bears can take the pivot levels at 1.3925 and 1.383 by storm. If not, we will start forming longs on the rebound.

GBP/USD, Daily chart