If any currency is capable of resisting the U.S. dollar, it is the British pound. Thanks to strong business activity and consumer confidence statistics, the GBP/USD bulls managed to secure a position above 1.27. The market reduced the chances of a repo rate cut by 25 basis points to 5% in May and does not rule out a relaxation of the Fed's monetary policy in March, providing support to the pound. Now, investors are awaiting cues from the Federal Reserve and the Bank of England.
The unexpected acceleration of inflation in Britain to 4% in December, along with the increase in business activity from 52.1 to 52.5 in January, the highest since June, made investors overlook the retail sales slump. According to S&P Global, the latest PMI statistics suggest that the UK GDP will expand by 0.2% in the first quarter. This indicates economic recovery after stagnation, allowing the Bank of England to keep the repo rate on a plateau longer and creating a tailwind for GBP/USD bulls.
Dynamics of Business Activity in Britain
Another proof that Britain is getting back on its feet is the rise in consumer confidence to a 2-year high in February, according to the research company GfK. The UK is ceasing to look like the sickest person in Europe, leading to the strengthening of the pound against the euro. The pound is actively competing with the U.S. dollar for leadership in the G10 currency race. Not surprisingly, the forward market predicts a repo rate cut of only 75 basis points to 4.25% in 2024 compared to a federal funds rate cut of 125 basis points to 4.25%. The slower easing of the Bank of England's monetary policy compared to the Fed extends a helping hand to GBP/USD bulls.
Bank of England Governor Andrew Bailey and his colleagues are expected to signal the end of the cycle of monetary restraint and a reduction in inflation forecasts. It is doubtful that any member of the Monetary Policy Committee will vote on February 1 for a repo rate hike. Monetary policy tightening is a thing of the past, opening the door to its loosening. However, most investors are confident that the BoE will not be in a hurry.
Dynamics of Consumer Confidence in Britain
The Bank of England will have an advantage since the FOMC meeting results will be known a day before announcing its verdict. The British regulator will have the opportunity to assess the market's reaction and make adjustments to the accompanying statement. However, in my opinion, the fate of GBP/USD will be decided not at central bank meetings but a little later—after the release of U.S. employment statistics for January.
Judging by the slowdown in inflation in the United States, the Federal Reserve needs signs of labor market cooling to start lowering rates in March. If it receives them, the U.S. dollar risks seriously weakening against major world currencies.
Technically, on the GBP/USD daily chart, there is a combination of the Three Indians and the Splash and Shelf patterns based on the 1-2-3 structure. In such a situation, it makes sense to set pending buy orders from the level of 1.276 and sell orders from 1.2655.