FX.co ★ GBP/USD bulls not hindered by Britain's worst recession in three centuries

The British economy has contracted 9.9% due to the pandemic in 2020. This is the worst result since 1709 when severe frosts brought a deep recession. The recession turned out to be more serious than in 1921 after the First World War and the Spanish flu. Britain's GDP sank deeper than any other G7 counterpart. For comparison, the economy of Italy contracted by 8.8%, France - by 8.3%, Germany - by 5%, the United States - by 3.5%. Nevertheless, despite all the colossal negative, investors continue to buy the pound like crazy.

What is the matter? The GBP/USD pair is moving steadily towards 1.4 not because Britain managed to avoid a double-dip recession (GDP grew by 1% in the fourth quarter). And not because of the reduction of political risks to zero (the friction between London and Brussels over Brexit from time to time excites the minds of investors, not to mention the floating talk of a referendum on Scottish independence). The answer lies in the accelerated vaccination in Britain, which is likely to lead to a rapid opening of the economy and rapid growth in the gross domestic product in the second quarter.

In mid-February, 15.6 million UK citizens were vaccinated, which is equivalent to 23.3% of the population. This is the fastest speed in Europe and the USA. At the same time, the decrease in the number of infected with COVID-19 in Britain fuels the optimism of sterling fans.

Vaccination rate in Europe and USA

The number of infected in Europe and the USA

The pound does look strong against its main competitors. The dollar and the yen are selling amid improved global risk appetite, while the euro is being held back by slow vaccinations in the EU.

In the third week of February, sterling will be tested upon the release of data on inflation, retail sales, and business activity. In my opinion, attention should be paid to purchasing managers' indexes. They may present a pleasant surprise against the backdrop of a large-scale vaccination campaign in the UK and the associated expectations of getting out of the lockdown. At the same time, rather modest forecasts (40.7 for the service sector and 53.8 for the manufacturing sector) can easily be exceeded by the actual data, which will provoke an attack from the bulls on GBP/USD.

I doubt that the consumer price slowdown in January will bring the Bank of England closer to a historic step - lowering the repo rate below zero. Everyone understands perfectly well that in the second quarter, the British economy will certainly be able to shoot, which will lead to an increase in inflation.

Technically, on the daily chart, the 161.8% target on the AB=CD pattern is getting closer and closer. It corresponds to 1.4. The strategies for forming long positions in GBP/USD on pullbacks, announced in early January, brought traders a lot of money. As, however, the purchase of sterling against the US dollar on the breakdown of resistance at 1.375, stated in the previous article. As we approach the psychologically important level of 1.4, I recommend fixing part of the profit and continuing to build up the remaining positions on the exhaustion of the corrective movement.

GBP/USD, daily chart