16.07.202110:42 Forex Analysis & Reviews: GBP/USD. Conflicting signals keep the pound in range

Yesterday, the pound received support from the Bank of England, but it lost all the won positions by the end of the day. The GBP/USD pair is still trading in the range of 1.3800-1.3900, although bears regularly hit the lower border of this range. The downward impulses, provoked by the strengthening of the US dollar, fade in the area of 1.3740-1.3780. From this area, sellers take profits and open longs, after which the pair safely returns to the range. The contradictory fundamental background allows traders to trade within the above-mentioned price range, alternately starting from its borders.

Moreover, it is worth noting that a contradictory fundamental picture has developed for both the pound and the dollar. Therefore, a kind of "pull-push" on the pair is due to the indecision of both buyers and sellers of GBP/USD. The situations are similar. Amid the recorded inflation growth (both in the US and in the UK), representatives of regulators take either a restrained or "dovish" position, contrary to the "hawkish" expectations of market participants. Such a dissonance does not allow us to develop a large-scale price movement on one of the sides – traders are forced to settle for a 100-point range, within which the pair has been trading for almost three weeks.

Strong data on the growth of American inflation was published this week. The overall consumer price index surged to 5.4% in June y/y. The last time the indicator was at such a peak was in the post-crisis period of 2008, and in the early 90s. As for the monthly terms, the overall CPI also came out in the "green zone": the index rose to 0.9% instead of the expected slowdown to 0.4%. The core inflation showed a similar trend, which reached 4.5% in annual terms (a 13-year record), and 0.9% in monthly terms (exceeding the forecast values). All components were released in the "green zone", showing record growth for three consecutive months.

In view of such dynamics, the US dollar strengthened its positions throughout the market including in a pair with the British pound. The GBP/USD pair tested the level of 1.37 again, temporarily falling below the lower limit of the above price range. But just the next day, Fed Chairman Jerome Powell exerted significant pressure on the US dollar as he made a speech to Congress with a semi-annual report. He reiterated that the US economy still needs incentives, and the rise in inflation is due to temporary factors. At the same time, he still admitted that the members of the US regulator will talk about ways to reduce asset purchases at the next meeting. This remark brought the dollar bulls back to their senses, and the GBP/USD pair drifted in the area of the 1.38 mark again.

It is worth noting that a similar situation has developed in the UK. Amid a record increase in inflation, the head of the English regulator voiced quite "dovish" messages. The only difference is that one member of the Bank of England, Michael Saunders, still allowed an early curtailment of QE in response to inflation releases.

Based on the published data, the June consumer price index surged to 2.5% in annual terms, which is the maximum growth rate since September 2018. it was during that period that the Bank of England raised the interest rate from 0.5% to 0.75%. On a monthly basis, the overall CPI rose to 0.5%, also exceeding the forecast values. The core consumer price index also showed similar dynamics – it surged to 2.3% in June, instead of the expected growth to the 2% mark.

Investors were also pleased with the retail price index, surging to 3.9% y/y (a multi-year high). The structure of the release suggests that the inflation growth is largely due to the increase in prices for food, used cars, and clothing. In turn, oil prices have risen the most – +20.3%, which is the maximum for more than 10 years.

However, the Bank of England's Governor, Andrew Bailey, neutralized the initial optimistic reaction of traders to the inflation release. Commenting on the published figures, he said that the Central Bank will not rush to make a decision on raising the rate, even despite the increase in inflation. He mentioned again that this growth is likely to be temporary, and will only include a period of recovery of the UK economy after the coronavirus crisis. At the same time, Bailey noted again that the reasons why the Central Bank believes that the growth of inflation will not be sustainable are sufficiently justified. Other representatives of the UK regulator also voiced out similar rhetoric.

That is why the "hawkish" remark of Michael Saunders that the English regulator will consider the issue of early termination of bond repurchase at one of the upcoming meetings only provided temporary support for the pound. In addition, Saunders voiced a lot of "ifs". According to him, the regulator may cancel some of the current monetary incentives – if the indicators of activity and inflation remain in line with the latest trends and if the risks of a decline in economic growth and inflation do not significantly increase.

Technically, the GBP/USD pair has been literally torn over the past few weeks between a record increase in inflation on both sides of the Atlantic and the unwillingness of regulators to respond to this growth. As a result, the pair is marking time within a wide 100-point price range. Summarizing everything, it can be assumed that this instrument will continue to trade in the price range of 1.3800-1.3900 in the medium term (lower line of the Bollinger Bands on the daily chart is the lower limit of the Kumo cloud on H4), with a short-term decline in the area of 1.3740-1.3780. It is suggested to consider long positions when approaching the lower border of the range, while ascending impulses to the level of 1.39 can be used as an excuse to open short ones.