17.07.202600:47 Forex Analysis & Reviews: GBP/USD. Correction or Reversal?

The pound, paired with the dollar, reached a two-month high on Wednesday, at 1.3557. Although there has been a significant southward pullback on Thursday, the pair overall retains potential for further growth — not only due to the weakening of the U.S. dollar.

However, it's essential to understand the reasons behind Thursday's correction. Traders reacted quite painfully to the economic growth data released for the United Kingdom. The release was indeed ambiguous, but it cannot be described as catastrophic for the British currency.

According to the released data, monthly GDP grew by only 0.1% in May, following a 0.1% decline the previous month. At first glance, this is a weak result. But the "devil is in the details."

First, the headline indicators emerged in the "green zone." For instance, most analysts had forecasted zero growth on a monthly basis. However, the economy did not present an unpleasant surprise that many feared after the April decline and rising energy prices. As mentioned earlier, GDP increased by 0.1% on a monthly basis, and the fact that the economy returned to growth under such challenging conditions is a positive signal.

Secondly, the most important figure is not the monthly measure but the three-month measure, which the Bank of England traditionally considers a more reliable indicator of economic dynamics. Over three months (including May), the British economy grew by 0.7%, compared with a forecast of 0.4%. On the one hand, this is slightly lower than the previous three-month period, in which GDP increased by 0.8%. On the other hand, this growth rate remains high, indicating that the economy maintains resilience despite deteriorating external conditions. Moreover, on a year-on-year basis, GDP grew by 1.3% — the strongest growth rate in the past nine months.

Finally, it is worth noting that the report's structure looks quite encouraging.

Thus, the key driver of growth has once again been the services sector, which grew by 0.3%. Particularly impressive dynamics were shown by high-tech industries, including software development, scientific research, and the pharmaceutical sector.

It is important to remember that the services sector accounts for about 80% of the British GDP, so its resilience is much more significant than any temporary weakness in industry or construction. These sectors of the economy indeed disappointed: the manufacturing sector shrank by 0.5%, while the construction sector contracted by 0.8%. However, these industries faced pressure largely due to external factors — rising energy prices and increased geopolitical uncertainty. Even amid these shocks, the British economy maintained positive dynamics, indicating its resilience.

In other words, the release published on Thursday cannot be deemed "dovish." The sustained growth in the services sector and strong three-month dynamics suggest that the central bank is unlikely to feel the need to rush to ease monetary policy. Thursday's release rather supports maintaining a wait-and-see position, which, under the current circumstances, is a fundamental factor supporting the pound.

Here, it is necessary to revisit the reasons that caused Wednesday's surge in GBP/USD by nearly 200 points. This dynamic was driven less by the weakening of the dollar than by the strengthening of the pound amid political events in the United Kingdom.

The future Prime Minister of the UK, Andy Burnham, stated on Wednesday that he intends to adhere to principles of budget discipline and will likely appoint Shabana Mahmood as Chancellor of the Exchequer, whom investors view as a proponent of more conservative fiscal policy. Her candidacy was perceived as a signal of continuity in government financial control and adherence to budget rules, whereas the appointment of a more left-leaning candidate (for example, Ed Miliband) would raise concerns about rising government spending and a widening budget deficit.

This is an important point for GBP/USD traders, as a stricter fiscal policy means lower levels of government borrowing, reduced risk of rapid debt growth, and increased investor confidence in British assets. Moreover, the market still remembers the crisis of confidence following Liz Truss's "mini-budget" in 2022 — hence, any signals favoring budgetary responsibility are now seen as positive for the British currency.

Therefore, in my view, the pair continues to have potential for further growth — any downward price retracements could be seen as opportunities to open long positions. From a technical standpoint, the pair is positioned between the middle and upper lines of the Bollinger Bands indicator on the four-hour chart, as well as above all lines of the Ichimoku indicator, which has formed a bullish "Parade of Lines" signal. The upper limit of the "working" price range is the 1.3560 mark, corresponding to the upper line of the Bollinger Bands indicator on the H4 timeframe.