The pound/dollar pair tested the 19th figure yesterday - for the first time since March 2020, when the British currency weakened to 1.1410 in the wake of the coronavirus crisis. But if at that time the price decline was impulsive and short-term, now the pair is showing a protracted, systematic, and multi-day decline. If we look at the "older" timeframes, we will see that the pair has been showing a downward trend over the past three months. If we talk about the daily chart, then here we are talking about an almost recoilless decline. In the context of W1 and MN, the price rolled back, but in general, a pronounced southern trend is visible to the naked eye. If at the beginning of March the GBP/USD pair was trading around the 34th figure, then this week the sellers were already below the 1.2000 target. Almost one and a half thousand points of decline in 3.5 months - this result speaks for itself.
The problems of the British problem began to manifest itself in early spring, when some representatives of the Bank of England began to doubt that the regulator needed to implement an aggressive scenario to tighten monetary policy, following the example of the Federal Reserve. At the same time, initially, the British Central Bank was more determined than the Fed: the cycle of interest rate hikes in the UK started in early February.
However, then the situation changed: fears began to sound more and more often in the market that the Bank of England was raising the rate despite the impending risk of recession. Recent reports on the growth of the British economy have only increased concerns about this. For example, this week almost all components of the corresponding release came out in the "red zone", significantly falling short of the forecast levels. Every month, the decline in UK GDP was 0.3%. At the same time, most experts expected a minimal, but still an increase in the indicator (by 0.1%). This component of the report has been in negative territory for the second month in a row. In annual terms, the growth rate of the British economy has been slowing for the third month in a row. But inflation shows the opposite dynamics: the overall consumer price index every month came out at 2.5% - this is the strongest growth rate since 1991. In annual terms, the CPI jumped to 9.0%. This is already a 40-year record.
In other words, the "specter of stagflation" began to manifest itself already in concrete figures against the background of the intensifying energy crisis, the growth of the oil market, and geopolitical tensions. The Bank of England, in turn, began to show a less decisive attitude compared to the hawkish zeal that it showed at the beginning of the year. Therefore, the pound is now actively losing its position, as it has become less attractive to investors, especially when paired with a safe dollar.
A peculiar bouquet of problems with the British currency was supplemented yesterday by another factor. This time - political. The so-called "Scottish question" has reappeared on the agenda.
Let me remind you that 8 years ago the Scots refused to secede from the UK. The corresponding referendum was held two years before another – historic – referendum, in which the majority of British residents voted in favor of leaving the EU. The Scots, as you know, voted against Brexit. After that, "separatist" sentiments intensified in the region: according to several sociologists, in the event of a second independence referendum, Scotland will leave Britain and join the European Union in the future. Anticipating such a scenario, London does not allow its implementation. The British government refers to the results of the 2014 referendum, stating that the Scots have already spoken on this issue.
In turn, the Scottish National Party has been working over the past 8 years to legitimize a second referendum, despite the categorical refusal from Downing Street. In this context, yesterday's statement by the First Minister of Scotland Nicola Sturgeon looks significant. She announced preparations for a second referendum on the region's independence from the UK. According to her, the vote should take place before the end of next year. Sturgeon called on Boris Johnson's government to issue a special order allowing a legally binding independence referendum. Downing Street has already rejected this proposal, but representatives of the SNP in response stated that they intend to achieve this goal. One important nuance should be noted here: Sturgeon's party leads the majority in the Scottish Parliament, advocating independence together with the Scottish Green Party.
In general, the "Scottish question" by itself is not yet able to exert significant pressure on the GBP/USD. However, under the current conditions, this factor supplemented the corresponding fundamental picture, allowing the bears of the pair to identify new price horizons.
In the medium term, the GBP/USD pair will follow the dollar, which will react to the results of the June Fed meeting. Therefore, trading decisions should be made after today's Jerome Powell press conference. If the Fed supports the greenback, the pair will continue its southern path. Otherwise, GBP/USD buyers will organize a fairly large-scale corrective pullback, which will be followed by a price reduction again. The support level (the target of the southern movement) is 1.1910 (the lower line of the Bollinger Bands indicator on the four-hour chart). The resistance level is 1.2250 (the Tenkan-sen line on D1).