05.07.202116:09 Forex Analysis & Reviews: Is BoE ready to turn a blind eye to the acceleration of inflation to 3%?

After the worst month (June) of the last nine, the British currency is gradually recovering. It would seem that after the Fed stopped ignoring the acceleration of inflation, the implementation of the Bloomberg consensus forecast for GBP/USD of 1.42 at the end of 2021 can be forgotten, but the mixed statistics on the US labor market convinced that it was too early to do this. Yes, employment outside the agricultural sector showed the best dynamics in the last 10 months, but the unemployment rate and average wages were disappointing. Does this allow the Fed to wait with the withdrawal of monetary stimulus?

British Pound Monthly Dynamics

It seems that, unlike the Fed, which is tired of being peaceful, the Bank of England, on the contrary, is ready to allow the economy to overheat. Its head, Andrew Bailey, entered into a correspondence dispute with retiring chief economist Andy Haldane. The latter predicted an acceleration of inflation to 4% by the end of 2021 and advised not to delay the normalization of monetary policy. Bailey responded that starting early monetary expansion could slow down GDP growth. According to him, after a temporary surge due to the exit from lockdowns, the UK economy will gradually return to the lower baseline growth rates that took place after the 2008 crisis.

Such "dovish" speeches, as a rule, mean that the Bank of England is ready to turn a blind eye to the acceleration of inflation to 3%, which it predicts by the end of this year. Approximately the same was said by the Fed until mid-June, which caused the US dollar to fall.

Low volatility plays on the side of sterling, allowing foreign investors to invest in financial markets and the UK economy and thus finance the negative current account balance, as well as the reaction of the population to the spread of the delta variant of COVID-19. Despite the increase in the number of infections to the highest levels since February, the number of hospitalizations and deaths does not go up. This shows that vaccines, which are already fully vaccinated by almost 50% of Britons, are working.

Pound volatility dynamics

The problem is that data on the epidemiological situation are delayed, so the next one or two weeks will be decisive for the pound and Britain as a whole. If the version that coronavirus vaccinations do not work against its delta variant, the chances of BoE's normalization of monetary policy will significantly decrease. The markets are currently citing August 2022 as the most likely date for a repo rate hike.

Thus, BoE and the Fed have essentially changed places: the former has become less aggressive, the latter has become more, but the GBP/USD quotes are growing. I believe that we are talking about profit-taking on shorts after the publication of statistics on the US labor market for June. Soon, the situation will stabilize and the bears will return.

Technically, the fate of GBP/USD will depend on resistance tests in the form of moving averages. A rebound from levels 1.388, 1.393, and 1.399 will be a reason for selling.

GBP/USD, Daily chart