Yesterday, the pound paired with the dollar updated this year's high, reaching 1.4376. The British currency has steadfastly withstood contradictory data on the labor market, remaining within the framework of the 43rd figure. However, today's release has exerted a strong pressure on GBP/USD bulls: the pair sank more than a hundred points. British inflation frankly disappointed traders, especially on the background of weak growth in wages. The market was once again talking about reducing the probability of a rate hike at the May meeting of the Bank of England, while last week the chances were estimated at 80%.
Despite the entire array of negative macroeconomic data in Britain, there are no grounds for panic, in my opinion. Moreover, the current situation makes it possible to advantageously open long positions in a pair, using the emotional reaction of the market. Today's release certainly loosened the pound - but it will not turn out to break the upward trend. There are several reasons for this.
First, a slowdown in inflation last month will not prevent the Bank of England from raising its bid at the May meeting. Negative figures of key indicators always provoke panic about the regulator's plans, but in this case I do not see any objective arguments for postponing the tightening of monetary policy to a later date.
Despite the slowdown in the consumer price index, inflation is still at a very high level (in annual terms - 2.5%), sufficient for another round of rate hike. Last year, when the English regulator raised the rate, consumer prices were in the range of 1.8% -3%. Core CPI also ranged from 1.6% to 2.5%. In other words, today's release is unlikely to affect the resolve of the members of the Bank of England regarding the May increase.
Here it is necessary to remember about another nuance. In March, bad weather raged in the UK: in some regions of the country a "red" level of weather danger was declared, while in others the "yellow" level was acting. A powerful cyclone from the Atlantic brought the strongest (and prolonged) heavy rains, and the temperature background was much lower than the climatic norm. Bad weather raged in Britain for several weeks, advancing in several stages.
This circumstance affected the daily life of British and tourists. The retail and entertainment industry, the construction sector and the industrial sector experienced the consequences of the cyclone: during the peak of bad weather, the British budget lost almost a billion pounds a day. This fact was reflected in the March PMI indices, which all without exception were in the "red zone". Why was the inflation indicator supposed to ignore such a state of affairs? It is only natural that such circumstances negatively affected the consumer activity of the Britons.
In addition, the growth of inflation indicators is slowing and due to the strengthening of the pound. In September of the year before last, when the consumer price index began to grow actively, the GBP/USD pair was trading in the 1.22 area. Since then, the pound against the dollar has risen in price by two thousand points, and this fact has its impact on inflationary processes. After the next rate increase, this trend will only worsen, because the devaluation will stop pushing the CPI upwards as actively as it was during the last year and a half.
All this suggests that the main problem of the pound lies in the further prospects of monetary policy after the May rate hike. The regulator is certain to take an indefinite pause: first, to assess the consequences of an increase in the rate to 0.75%, and secondly - to monitor inflation in conditions of rising British currency. And you can not forget about Brexit. In a year the UK will officially leave the EU, which, undoubtedly, will affect the British economy, depending on the agreements reached. In any case, the Bank of England is unlikely to take the responsibility to tighten monetary policy in such a difficult time for the country.
However, all this is a matter of a distant future. Within the medium term, the pound may receive an excuse for its growth: as soon as one of the representatives of the English regulator confirms the intention to raise the rate in May. In this context, we should pay attention to the speech of the deputy head of the Bank of England, Jon Cunliffe, who will address tomorrow at the financial forum in Washington. If he maintains an optimistic attitude, the pound will quickly return to its positions. By the way, at the March meeting, Cunliffe voted against the rate hike (this decision was made only by Ian McCafferty and Michael Sanders), so his current position will have a significant impact on the market.
From a technical point of view, the GBP/USD pair remained within the upward trend, despite the price retreat. On the daily chart, the pair is located between the middle and top lines of the Bollinger Bands indicator, and the Ichimoku Kinko Hyo indicator continues to display the bullish "Line Parade" signal. The resistance level is 1.4170 (line Tenkan-sen) - today the bears of the pair did not cope with this target. But the nearest northern target is the price 1.4325 (the top line of the Bollinger Bands indicator). Fixed above this mark, GBP/USD bulls will open the way to the key level 1.45.
