20.07.202108:43 Forex Analysis & Reviews: GBP/USD. Pound had a gloomy Monday

The GBP/USD pair collapsed by more than a hundred points on the first trading day of the week, updating multi-month lows. The pair reached the level of 1.3654 – the last time traders were at such lows 7 months ago, namely in January. The British currency left the wide price range of 1.3750-1.3900, within which it has been trading for almost the last three weeks. It should be admitted that the GBP/USD pair collapsed sharply and unexpectedly, even amid the weak behavior of the US currency. The US dollar index is drifting near the borders of the 93rd mark and does not show much activity. In view of a half-empty economic calendar, dollar bulls were taking a wait-and-see position, suspending the offensive throughout the market.

In this case, it is safe to say that the pound plunged solely due to its own reasons. This is proven by the price dynamics of cross-pairs with the participation of the British currency (e.g. GBP/JPY).

It is also worth noting that the pound collapsed on the so-called "Freedom Day", which is on the day when almost all quarantine restrictions were lifted in Great Britain. In my opinion, the market interpreted this event in a special way, anticipating new lockdowns at the end of the year. After all, the British authorities have weakened the quarantine as much as possible against the background of the deterioration of the epidemiological situation in the country. In the UK, the number of people infected with coronavirus is growing, and in 95 percent of cases, we are talking about the Indian strain – the Delta variant of COVID-19. Last Friday, more than 50 thousand daily cases of coronavirus were registered in the country. This is not far from the historical maximum – the largest number of daily cases recorded in Britain was 68,053 (January 8). And just yesterday, more than 48 thousand cases were recorded in the country – this is more than in any other country in the world.

On the one hand, Downing Street kept its promise and relaxed quarantine in England (where 85% of the state's population lives), but on the other hand, they did it before a new wave of morbidity. Even before Freedom Day, Health Minister Sajid Javid warned that the number of daily registered infections in the country could exceed 100 thousand in the near future. In addition, the decision of the Johnson government directly contradicts the recommendations of the WHO, whose experts advise maintaining measures to contain the coronavirus, despite vaccination (like Israel). However, representatives of the Prime Minister argue their actions by the fact that despite the increase in the number of infections, the rates of deaths and hospitalizations remain significantly lower than the winter figures – vaccinated people carry the disease more easily. But judging the reaction of the market, traders are still concerned that the hasty actions of the British government will lead to a new lockdown this autumn or winter.

The Bank of England's representative, Catherine Mann, who will become a member of the Monetary Policy Committee from September 1, also added pressure on the pound yesterday. Mann voiced extremely "dovish" rhetoric, ruling out tightening the parameters of monetary policy. She assured journalists that inflation will show a downward trend next year, so it is impossible to talk about "hawkish" decisions at the moment. Moreover, the representative of the English regulator allowed a reduction in the interest rate. In her opinion, the Central Bank should follow one of the ways: to reduce the rate to the negative area or to extend QE. At the same time, she made it quite clear that she was in favor of the first proposed option. Mann noted that negative rates are often resorted to too late, while assistance to the British economy is needed "here and now". Summarizing her speech, she emphasized that one should never say "never" about negative rates.

Such rhetoric increased the pressure on the GBP/USD pair. It should be recalled that at the beginning of this year, the Bank of England presented the results of its research, voicing a general "verdict" on the prospects for a rate cut in the negative area. According to the country's commercial banks, they will need from six to eight months to adapt to the rate cut in the negative area. At that time, traders perceived this message as a signal for easing monetary policy in the near future. However, the head of the regulator hastened to reassure investors, saying that this study was conducted, just in case if the need for a negative rate really arises. And now that Catherine Mann is here, the issue of reducing the rate was on the agenda again.

Moreover, the British currency suffered from general risk aversion. The global markets experienced one of the worst days of the year yesterday – in particular, European stocks fell by 3%, and the Dow Jones by 2.10%.

As a result, the fundamental background of the pair contributes to the further decline of the GBP/USD pair. On the daily time frame, the pair is located below the lower line of the Bollinger Bands indicator, as well as under all the lines of the Ichimoku indicator, which formed a strong bearish signal "Line Parade". This indicates a clear advantage of the downward movement. The main downward target is set at the lower line of the Bollinger Bands indicator on the weekly chart, that is, at the 1.3600 mark.