Nobody wanted to give in. Approximately, this is how the balance of power in the GBPUSD pair can be characterized. Each of the opponents has its own trump cards: if the dollar armed itself with a worsening global risk appetite against the backdrop of falling global stock indices, then strong macro statistics on Britain, progress in Brexit negotiations and aggressive monetary restrictions of the Bank of England play on the side of the pound. Let's see who's nerves are stronger.
In 2021, the UK GDP grew by 7.5%, which was the best dynamics of the indicator since 1940. In November-December, due to a new wave of COVID-19, the economy shrank by 0.2%, but this is better than the -0.6% expected by Reuters experts. In general, there was an increase in the fourth quarter due to a strong October. And although the gross domestic product of Britain, unlike the United States, China, and the eurozone, has not yet fully recovered to the levels that took place before the start of the pandemic, the IMF expects it to expand by 4.5% in 2022. The forecast of the authoritative organization for the United States, by the way, is +4%. The outpacing dynamics of the British economy over the American one is a strong argument in favor of buying GBPUSD.
Dynamics of the British economy
Alas, the pound cannot yet use this trump card, as well as the information that London has made concessions to the EU, agreeing to conduct customs checks on goods intended for sale only in Northern Ireland. The reason for everything is the return of investor interest in the US dollar against the backdrop of the development of a correction by U.S. stock indices and the "hawkish" rhetoric of FOMC officials. St. Luis Fed President James Bullard is ready to vote for a 50 basis point hike in the federal funds rate in March, and hints that in previous years, the Fed could organize an extraordinary meeting at which a decision would be made to tighten monetary policy.
Currently, the derivatives market expects the Fed to increase borrowing costs at 6 FOMC meetings in 2022, which contrasts sharply with the forecasts that took place at the end of 2021. Then it was about 1-2 acts of monetary restriction. However, the Bank of England has something to answer its colleagues from Washington. According to a Bloomberg insider, BoE has started talks with the Treasury about how to sell the bonds it owns. As part of the implementation of £875 billion in QE, a lot of them have accumulated, and inaccuracy in this matter can hurt both the debt market of the UK.
BoE bond holdings dynamics
According to the plan of the Bank of England, the balance sheet reduction should begin when the repo rate reaches 1%. However, if back in August BoE predicted that this would happen only in 2026, then, in fact, borrowing costs can reach this level already in the spring. Especially if inflation continues to accelerate. Bloomberg experts expect to see it at the level of 5.4% in January. If prices rise faster, the sterling bulls will have a new reason to attack.
Technically, only a break of the diagonal support near 1.34 and the realization of the 1-2-3 reversal pattern will make GBPUSD buyers throw a white flag. I do not think that this will happen, and I recommend buying the pair from the 1.34–1.35 area.
GBPUSD, Daily chart