21.03.2023 01:57 PM
GBP/USD: Ahead of inflation report and Bank of England meeting

On March 8, GBP/USD updated a multi-month price low, reaching 1.1802. This week, the pair tried to approach the boundaries of the 23rd figure: the high of yesterday was fixed at 1.2283. In two weeks, the pair grew by more than 450 pips—primarily due to the weak greenback. Note that 1.2280 is a rather strong resistance level, which corresponds to the upper line of the Bollinger Bands indicator on the daily chart. As we can see, the buyers of GBP/USD could not overcome it impulsively, although the bullish sentiment of the pair still remains.

The coming days will be decisive for the pair: on Wednesday, the result of the March Fed meeting will be announced, and Britain will publish its key inflation data. On Thursday, the Bank of England will hold its meeting in March.

In fact, the pound has two tracks: either it will rise to the next price barrier at 1.2410 (that is the upper Bollinger Bands line on the weekly chart), or it will go back to the base of the 20th figure (where the middle Bollinger Bands line on the D1 timeframe coincides with the Tenkan-sen and Kijun-sen lines).

British inflation in the spotlight

Last Friday, the results of the quarterly survey conducted by the Bank of England in cooperation with the research company Ipsos were published. According to the data, the median inflation expectations of British residents for the coming year have declined sharply. If in November the figure was at 4.8%, in February, it dropped to 3.9%. Note that the representatives of the British regulator have repeatedly stated that the central bank expects a rapid decline in inflation during the year. The same rhetoric was voiced by representatives of the British government. For example, Finance Minister Jeremy Hunt, when presenting a new financial plan of the government in the parliament, predicted the decline of inflation to 2.9% by the end of the year. Although such assumptions look too bold, the main inflation indicators show a downward trend.

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Tomorrow, March 22, the U.K. consumer price index growth data for February will be released. Recall that the January report was not on the pound's side. For example, in monthly terms, CPI came out at -0.6% (with the forecast decline to -0.4%). For the first time in the last year, this component turned out to be in the negative area. In annual terms, the CPI came out at 10.1%, with a forecast of 10.3%. A smooth but consistent downward trend has been recorded here for the third month in a row. The main consumer price index also declined significantly to 5.8%, with forecast of 6.2%. This is the weakest growth rate since June 2022.

According to preliminary forecasts, inflation will also show signs of slowing down in February. In particular, on an annualized basis, the overall CPI should reach 9.9% (the lowest value since August last year). The core index, which excludes food and energy prices, should hit 5.6%, the lowest level since March last year. Other inflation indicators—the purchasing price index and the producer price index—should similarly show a downward trend, reflecting a slowdown in inflation.

The downward target is 1.2140

It is worth noting that the inflation report will be published the day before the next Bank of England meeting. Recall that in early March, BoE Governor Andrew Bailey said that the central bank may have already ended the current cycle of rate hikes, "but it is too early to speak with certainty about the future trajectory of monetary policy." Similar hints of a dovish nature were voiced by the central bank at the February meeting—the rhetoric of the accompanying statement then noticeably softened.

Recently, the head of the Bank of England no longer resorts to half hints and declares his position more straightforwardly. According to him, some further increase in the rate "may be justified," but the corresponding decision "has not been made yet."

It can be assumed that if tomorrow's inflation data is in the "red zone," the Bank of England will likely maintain the status quo this month. The pound, respectively, will be under pressure throughout the market, including paired with the greenback.

From a technical point of view, the GBP/USD pair on the D1 timeframe is located between the middle and upper lines of the Bollinger Bands indicator, as well as above all the lines of the Ichimoku indicator. But at the same time, the buyers of the pair could not overcome the upper line of the Bollinger Bands (mark 1.2280), after which the sellers seized the initiative. If tomorrow's inflation report is not on the side of the pound, the pair may decline to 1.2140 – this is the lower limit of the Kumo cloud on the same timeframe. The next support level is 100 pips below (1.2040): at this price point, the average Bollinger Bands line on the D1 timeframe coincides with the Tenkan-sen and Kijun-sen lines. However, it is too early to talk about achieving this target.

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