The pound against the dollar is testing the 21st figure for the first time since May 2020, when the pound collapsed under the weight of the first wave of the coronavirus crisis. The price has been plunging for the third consecutive month, having already lost more than 1200 points: if at the beginning of March the GBP/USD pair was in the area of 34 figures, today the bears have updated the low at around 1.2164. And apparently, the bears are not going to stop there, given the strength of the greenback and the consistent weakening of the British currency. On the horizon, the outlines of the 20th figure are already clearly visible, the achievement of which is seen as a matter of time.
It should be emphasized that the GBP/USD pair is actively declining not only due to the strengthening of the dollar, but due to the weakening of the pound throughout the market. The pound is losing its positions in many cross-pairs (for example, GBP/JPY), reacting to the changed fundamental background. The Bank of England, which for many months was an ally of the pound, is now not. Cautious wording and pessimistic forecasts of the English central bank forced traders to reconsider their attitude towards the British currency.
Data on the growth of the UK economy was published today. All components of the release came out in the red zone, reflecting a very disturbing trend. The published figures vividly illustrated the results of the Bank of England's May meeting, at which the forecast for GDP growth this year worsened, while inflation was growing at the same time. Therefore, it is not at all surprising that the GBP/USD bears got a second wind today: the risks of stagflation have taken on quite real outlines. In addition, the news about Brexit in the context of the conflict over the Northern Ireland Protocol also put additional pressure on the pound.
But let's start with today's macroeconomic report. According to released data, the UK economy in the first quarter grew by only 0.8% Q/Q (against the forecast of growth to 1.0% and the previous value of 1.3%). On a monthly basis, the situation is even worse: for the first time since December last year, the indicator fell into the negative area (-0.1%), with a forecast of zero growth, as in the previous month. The volume of industrial production in March fell by 0.2%, while experts expected a minimal increase of 0.1%. The processing industry also showed similar dynamics, decreasing by 0.2% (the forecast was at the level of 0.00%).
The weak growth of the British economy has once again brought back to the agenda the assumption that the British central bank will not implement an aggressive scenario to tighten monetary policy. Recently, many representatives of the central bank (including BoE Governor Andrew Bailey) began to use rather cautious wording, the essence of which was reduced to the risks of the "reverse side of the coin". By and large, the Bank of England must make a choice: either actively raise the rate further, fighting inflationary growth, but at the same time pushing the economy into recession, or "reconcile" with further inflation, hoping for an increase in GDP or at least stagnation. And apparently, Bailey is leaning towards the first option.
In particular, according to Standard Chartered analysts, the British central bank will raise the rate in June and (possibly) August, after which it will pause indefinitely. In their opinion, Britain's GDP growth will slow down in the second quarter of this year, while inflation and interest rates rise, limiting the purchasing power of the population. In addition, there are certain prerequisites for increased inflationary growth in 2-3 quarters, in particular due to new problems with supply chains and logistics due to the wave of lockdowns in China. Plus, the rise in the cost of energy resources against the background of the sanctions confrontation with Russia.
Such a fundamental background puts the strongest pressure on the pound, which is further enhanced by Brexit. To be more precise, we are talking about the ups and downs around the Northern Ireland Protocol. As you know, this document, following the Brexit Agreement, was intended to resolve the issue of the border between Northern Ireland, which is part of the UK, and the Republic of Ireland, which is a member of the European Union. London has been wanting to revise the terms of this protocol for a long time. Recently, negotiations on this issue have intensified, and the rhetoric of the parties has taken on an ultimatum. For example, according to Bloomberg, the European Union is ready to suspend a trade deal with Britain if it unilaterally cancels the Northern Ireland Protocol. In turn, according to the British media, London gave Brussels until the beginning of next week to soften the terms of the protocol. Otherwise, according to journalists, Britain will pass the corresponding law, unleashing a virtual trade war.
Thus, the existing fundamental background contributes to the further decline of the GBP/USD pair. The same goes for "technique". The pair is between the middle and lower lines of the Bollinger Bands indicator on the D1 timeframe, as well as under all the lines of the Ichimoku indicator, which has formed a strong bearish "Parade of Lines" signal. This indicates a clear advantage of the downward movement. The main target of the downward movement is located on the lower line of the Bollinger Bands indicator on the daily chart, that is, at around 1.2120.