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The pound is now at a crossroads, and analysts are divided over where it will go. Long positions are declining, so a correction is likely. Sterling wavered on Tuesday on news of growing tensions between Britain and the EU. The European Commission has filed legal action for alleged breach of the Brexit deal by modifying trade agreements for Northern Ireland. This topic raises concerns among investors, but there was no sustained reaction. Markets will closely monitor further developments, but there are doubts that they will be a catalyst for sales. Now there are more important driving factors that investors will focus on.
On Wednesday, the US Federal Reserve will announce its decision on the rate with the accompanying statement to it, while the economic forecasts from the FOMC will be published. Next, Jerome Powell will give a press conference. His comments may change the direction of the dollar, which will affect the position of the GBP/USD pair.
Meanwhile, the Bank of England is set for a meeting on Thursday. While there shouldn't be any surprises here, short-term volatility in the pound may well happen.
Be that as it may, the sterling still has reasons to rise. Vaccinations in England are successful. Investors are pledging for a faster recovery of the country's economy after the pandemic, which will have a beneficial effect on the British currency.
During the Asian session on Wednesday, the sterling was still in bearish sentiment. Clear resistance lies at 1.3905. Its short-term breakout was recorded, but buyers still do not have enough strength to completely take over the situation.
Despite the rebound, a bearish development is likely for the GBP/USD pair. If the pressure on the sterling increases, potential targets for sellers will be the levels of 1.3830, 1.3775.
A breakout and a consolidation above the level of 1.3905 can be considered a signal for this scenario. In case of such a development of events, buyers will try to drag the sterling first to the levels of 1.3930 and 1.3990, and then above 1.4000.
Speaking about the drivers for the sterling, analysts believe that the British currency will outperform the euro. This is amid the reluctance of the Bank of England to fight the growing yields on government debt. The ECB, however, announced last week a significant increase in the volume of the asset repurchase program.
At the same time, the sterling is likely to lag behind the US dollar. UK bonds were selling at a faster pace than US Treasury bonds.
The spread between the US and British "10-years" last week dipped below the upward trend line, which originates from the levels of the end of 2018. This week, the indicator did not manage to recover, the border was not taken. If the spread continues to show a downward trend, the pound will show similar dynamics and decline against the dollar.
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