This week, GBP/USD tested the 1.25 mark, taking advantage of the dollar's weakness. On Tuesday, the pair updated a multi-month price high, marked at 1.2524. The last time the pound was at such a level was in June 2022. And although the bulls could not stay at this level, the pound still has the potential to rise further. The growth prospects are not just due to the dollar's weakness: the British currency is also capable of showing strength amid increasing global risk appetite.
Arguments in favor of the bullish scenario
Let's start with the fact that the British currency tends to strengthen in April. In eight out of the last ten years, the pair has been showing an uptrend in mid-spring. Of course, these observations are not binded to any practical conclusions, but the fact remains.
There are several objective reasons why the pound is strengthening - an improvement in the trade balance of the UK, increased activity in the domestic market, positive Brexit news and an unexpected upsurge in inflation in the country.
By the way, the last macroeconomic factor actually predetermined the results of the Bank of England's March meeting. The central bank increased the interest rate for the eleventh time (although this time only by 25 points), contrary to rumors about the end of the current cycle of monetary tightening. At the same time, the central bank made it clear that it is ready to continue tightening monetary policy if inflation accelerates again. BoE Governor Andrew Bailey expressed confidence that the inflation surge is temporary and will be followed by a significant decline. But not all market participants share the same optimism. After all, amid weakening overall inflation (due to lower energy prices), food inflation is growing in Britain.
Let me remind you that in February, UK inflation accelerated to 10.4%, contrary to forecasts of a further decline. Commenting on the report, representatives of the National Statistics Office (ONS) noted that the acceleration of inflation was recorded for the first time in four months and was due to a significant increase in prices in restaurants and hotels (by 12.1%, the highest rate of growth since June 1991). Clothing and footwear rose by 8.1%, alcohol and tobacco products by 5.7%, and transportation services, including fuel, by 2.9%. Payment for housing and utilities rose by 26.6%. There was no shortage of impressive anti-record: the cost of food and soft drinks soared by more than 18%. This is the biggest increase since August 1977 (!).
GDP + Brexit
It is worth noting that inflation accelerated on the release of good data on the growth of the British economy. According to revised data, the volume of UK GDP in the fourth quarter of last year increased by 0.1% after declining by 0.3% three months earlier. The largest contribution to GDP of the United Kingdom was made by the service sector, which recorded an increase of 0.1% in October-December. Consumer spending in the fourth quarter of 2022 increased by 0.2%.
The data signals that Britain managed to avoid recession. The economy has partially recovered from the severe fall at the end of 2022 and is more resilient than previously expected.
And although economic growth is rather shaky (output in both manufacturing and construction fell in January), the pound feels very comfortable. The fundamental background allows the British central bank to continue tightening its monetary policy, albeit at a moderate pace. This fact supports the British pound.
In addition, the pound reacted positively to the latest news related to Brexit (or rather, its consequences). According to the British media, a new model of customs inspection will be introduced soon: checks of goods coming to the UK from the EU "will be greatly simplified". According to Sky News, the most stringent inspections will be of food products, "but even in this area it is assumed to be as lenient as possible".
In general, the fundamental picture for the pair promotes further development of an uptrend. The technical picture also points to the same thing. On the daily chart, the pair is between the middle and the upper lines of the Bollinger Bands indicator, above the Tenkan-sen and Kijun-sen lines and above the Kumo cloud. It means that the price can continue to rise until it hits 1.2530 (the upper line of Bollinger Bands). It is noteworthy that on the weekly chart, the above-mentioned indicators have formed something similar, confirming the bullish sentiment.