22.03.202112:34 Forex Analysis & Reviews: Sterling keeps up with the dollar

The Bank of England is following in the Fed's footsteps, improving its outlook for economic growth, but has no intention of raising its benchmark interest rate until there is clear evidence that the recovery does not eliminate spare capacity and the Monetary Policy Committee is fulfilling its mandate to achieve a steady 2% inflation target. The sterling is also behaving exactly like the US dollar. It fell in response to the Central Bank's verdict. However, the decline in the USD index was short-lived: the day after the March FOMC meeting, it already managed to recover its losses. What to expect from sterling?

The Bank of England certainly had a choice. Following the example of the ECB, it could voice its concerns about rising UK bond yields and accelerate QE asset purchases. However, given that London is not stingy with fiscal stimulus, and Britain is among the leaders in terms of the proportion of mass vaccinations against COVID-19, the situation in this country is more similar to the United States than to the eurozone. BoE said the accelerated vaccination will help Britain emerge from lockdown faster and its economy will sag less in the first quarter than previously expected.

Dynamics of forecasts for UK GDP

On the other hand, the central bank is less confident in the medium-term outlook for the economy than in the short-term. In its accompanying statement, the word "risks" was mentioned seven times, compared with two following the results of the previous MPC meeting, and the opinions of the Committee members were divided. However, the latter circumstance is hardly surprising, given that there are plenty of "doves" and "hawks" in the regulator. According to Andy Haldane, inflation is a tiger that is difficult to tame, and the economy, with its strong deferred demand, is a spring.

Household sentiment is indeed improving, thanks to massive fiscal incentives, accelerated vaccinations, and hopes of getting out of the lockdown. This is evidenced by the GfK data, stating that the rebound in consumer confidence in March was the largest in almost a decade.

Thus, neither in the economy, nor monetary policy, nor in the speed of vaccination, the US dollar has no advantage over the pound. On the other hand, the rupture of economic ties with the EU due to Brexit can be attributed to the sterling's liability. In January, imports of Britain dipped by 29%, and exports by 41% m/m. The dollar as a safe-haven currency can be supported by the failure of the first negotiations between the United States and China since Joe Biden came to power. However, the cold tone of the dialogue does not mean a resumption of the trade war.

The week to March 26 will be extremely busy for the pound. Releases of data on the labor market, inflation, business activity, and retail sales force investors to take a closer look at it.

Technically, a Splash and Shelf pattern was formed on the daily chart of the GBP/USD. A breakout of the lower border of the consolidation range ("shelf") 1.38-1.4 will be a reason for selling and will increase the risks of developing a correction in the direction of the target by 200% on red AB=CD. On the contrary, a successful storm of the resistance at 1.4 will create the preconditions for the recovery of the upward trend.

GBP/USD, Daily chart