02.10.2023 10:57 AM
GBP/USD bulls' attempt to counterattack thwarted

Another revision of GDP by as much as 2 percentage points showed that the UK economy was 1.8% larger by the end of the second quarter than before the pandemic. Britain is no longer lagging and has surpassed Germany. Its growth rates are comparable to France and only slightly lag behind Italy. This is good news for the pound, although it is already factored into GBP/USD quotes.

Recovery of G7 Economies after the Pandemic

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The market takes everything into account. When the pound took the lead in the G10 currency race at the beginning of the year, many investors were surprised. Can a currency be strong with a weak economy? In the end, Forex was right: Britain was underestimated, and the dynamics of GBP/USD signaled that not everything was known to investors. However, the current peak of the pair is a completely different story.

Both the Bank of England and the U.S. bond market contributed to it. By not raising the repo rate in September and not making specific hints about the resumption of the monetary tightening cycle, the BoE firmly closed the door to tightening monetary policy. Although the short-term market still expects borrowing costs to rise to 5.5%, the assumed ceiling rate has fallen significantly from over 6.25%. This negative dynamics laid the foundation for the peak of GBP/USD.

In any pair, there are always two currencies. And the U.S. dollar has proven that it's too early to write it off. The USD index tripled an 11-week rally thanks to rising Treasury yields and declining stock indices. September was, so far, the worst month of the year for the S&P 500. Investors are getting used to the new reality of higher interest rates. Stocks now face serious competition from bond yields and bank deposit rates. The main beneficiaries of this are safe-haven assets. First and foremost—the U.S. dollar.

In theory, a slowdown in inflation should have hit the dollar, as it reduced the likelihood of the Fed resuming its monetary tightening cycle. But in reality, the divergence in monetary policy is far from the only trump card of the U.S. dollar. There is also high demand for safe assets and American exceptionalism.

Dynamics of Inflation in the United States

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The GBP/USD was not helped by the Congress's verdict on the falling flag regarding the delay in the U.S. government shutdown until mid-November. Up until that point, the approaching X date had pushed up Treasury bond yields. However, expectations are worse than the reality itself. If a shutdown had occurred, there would have been bond purchases based on the fact, which would have resulted in a yield decrease. And so, after 45 days, history could repeat itself. So, isn't it better to continue selling debt obligations?

Technically, the formation of a pin bar on the GBP/USD daily chart indicates the bulls' weakness. We will try to play it by placing a pending sell order for the pound against the U.S. dollar at the level of 1.2175. The first target remains the same—1.21. After reaching it, we will consider levels 1.206 and 1.196.

Marek Petkovich,
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