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The GBP/USD currency pair traded very weakly on Wednesday. Despite the morning release of the inflation report, which is both important under current circumstances and showed quite resonant figures, traders found little reason to react. Several conclusions can be drawn from this.
Firstly, the decline in inflation from March's 3.3% was already priced in last week. It was then that the market received the first forecasts for April inflation and concluded that inflation would not accelerate, making it impractical for the Bank of England to tighten monetary policy. Therefore, the British pound fell not only due to geopolitical factors but also because of a shift in market sentiment ahead of the next meeting of the British central bank.
Secondly, the market continues to ignore the macroeconomic backdrop. Although the inflation report could have been reflected on last week, it became known yesterday that inflation fell not to 3% (as predicted) but to 2.8%. Core inflation dropped to 2.5%. These figures were not anticipated by traders, making it completely logical to expect a significant decline in the pound on Tuesday. After all, the BoE is now guaranteed to keep the key rate unchanged. However, the pound had already shown a sharp decline last week, hence the report remained overlooked on Wednesday.
Thirdly, the UK inflation report showed that geopolitics remains the primary concern for traders. Last week, they priced in all the bearish factors for the British economy, but then shifted their attention back to geopolitics. However, aside from hostile statements and threats from Washington and Tehran, there is nothing more. One wishes that this situation remain unchanged. No one seems to believe in a peace agreement now, and the principle NACHO ("Not A Chance Hormuz opens") only confirms this. It is unlikely that the market will continue to buy U.S. dollars solely in response to threats from the White House and Tehran for a couple more months. Both sides can verbally attack each other as much as they want, but no one wants to go to war.
Thus, the latest round of decline for the British pound may have reached its conclusion. The BoE's refusal to raise rates is already priced in, the possibility of renewed escalation in the Middle East has been factored in, and the political crisis in the UK has been reflected in prices. Therefore, selling GBP/USD may only resume if new negative news emerges from the UK or is related to the U.S.-Iran conflict.
Should we now expect a recovery for the British currency? In the near term, probably not, as a positive geopolitical development is now required for the pound to rise. Without a new dose of optimism that reignites market hopes, it is unlikely the market will start shedding safe-haven dollars. At the same time, we do not particularly believe in further growth for the U.S. dollar either. The situation remains complex and ambiguous.
The average volatility of the GBP/USD pair over the last 5 trading days is 105 pips, which is considered "average" for the pair. On Thursday, May 21, we anticipate movement within a range between 1.3335 and 1.3545. The upper channel of the linear regression has turned upward, indicating a recovery of the bullish trend. The CCI indicator has not formed any signals recently.
The GBP/USD currency pair has sharply declined, making the bullish trend currently irrelevant. Donald Trump's policies will continue to exert pressure on the U.S. economy, so we do not expect the dollar to strengthen in the long term. However, 2026 appears to be super positive for the dollar so far.
Thus, long positions targeting 1.3489 and 1.3545 can be considered when the price is above the moving average. If the price is below the moving average, short positions can be taken with targets of 1.3367 and 1.3335 on technical grounds. The market situation has flipped upside down in just one week.
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