FX.co ★ Overview of the GBP/USD pair. May 20. Andrew Bailey: UK inflation won't be above target for a long time.

4-hour timeframe

Technical details:

Higher linear regression channel: direction - upward.

Lower linear regression channel: direction - upward.

Moving average (20; smoothed) - upward.

CCI: 58.6443

On Wednesday, May 19, the British pound also slightly corrected within the upward trend, which has been going on for more than a month. And this is if we talk about a local upward trend. The global crisis began 14-15 months ago, and during this time, the British currency has risen by 28 cents against the US. However, as we have repeatedly said, the fundamental background that should have contributed to the pound's fall now has no meaning for traders and markets. The pound continues to rise for the same reasons as the European currency. In the United States, the money supply is inflated, thanks to constant monetary injections from the Fed and Congress, which leads to a depreciation of the dollar in the foreign exchange market. In addition, inflation in the US promises to be much higher than in the UK or the European Union. For comparison, the latest reports on inflation say that it accelerated to 1.6% y/y in the European Union and the UK - to 1.5% y/y. In the US, inflation is already 4.2%, and, according to most experts, it will continue to grow. The Fed is inactive and does not even hint at a possible tightening of monetary policy or the curtailment of the quantitative stimulus program. It means only one thing: the dollars will continue to become more and more. And the US currency will continue to devalue. And the fundamental background, which would have sent the British pound to the mark of $ 1.30 a long time ago, does not matter now. Remember how the British currency became cheaper until 2020, during the "Brexit period." What has changed now? Is the UK economy off its knees? No. It still lags behind the development of the American one. Are the UK's geopolitical problems solved? No.

On the contrary, with the implementation of Brexit, there are more of them since now Scotland is determined to leave the Kingdom, and similar separatist sentiments are now maturing in Northern Ireland. The only positive thing for Britain is the gradual lifting of quarantine restrictions and the high rate of vaccination of the population. There is no more positive news.

Meanwhile, there was another speech by the Chairman of the Bank of England, Andrew Bailey. This time, in the UK Parliament, the head finally began to talk about the economy and monetary policy. His several previous speeches did not address these issues at all. According to Bailey, the Bank of England will not allow inflation to go far above the 2% level. Many experts immediately interpreted these words as a hint of a possible rate hike. However, in reality, Bailey only wanted to say that inflation is unlikely to accelerate at the same pace as in the United States. The latest inflation report did show an acceleration, but only 1.5%. Even with this increase, inflation in the Foggy Albion remains below the target level. Representatives of the monetary committee of the Bank of England believe that in the last year, inflation has significantly suffered due to the fall in energy prices, which negatively affected prices in all areas of the economy. Recently, oil prices have increased, and Andrew Bailey attributes the increase in prices not to budget and monetary stimulus but the increase in oil prices. Bank of England economists believe that inflation will continue to accelerate and be about 2.5% by the end of the year. A period of slowdown will begin, and the indicator will return to the target of 2%. Andrew Bailey also said that the economy has already received a boost to the recovery. The high rate of vaccination allows us to count on the fact that the budget stimulus can be curtailed next year. The Bank of England also said that the latest surge in price growth is more related to the lack of supply of certain goods in specific industries, as well as the desire of companies to return to the fight for the market as soon as possible against the background of the removal of coronavirus restrictions. According to Bailey, there is now a mismatch between actual demand and total supply. An imbalance was caused by the year of the pandemic and the crisis. Manufacturers misjudge production volumes now and have not yet managed to adjust to the current level of demand.

Meanwhile, Boris Johnson insists on the need to continue implementing the plan for a gradual exit from quarantine. Recall that this plan contains four stages of gradual lifting of restrictions, and the third stage was implemented this Monday. Although some medical experts believe that the "Indian" strain of "coronavirus" can provoke a third wave of diseases, the Prime Minister supports lifting all restrictions in June. Johnson said that at the moment, there is no reason to extend even the most minor restrictions, and the "Indian" strain of COVID is under close surveillance. Also, according to the Prime Minister, at this time, a study is being conducted on how contagious the "Indian" strain is and how much the immunity of Britons has been strengthened thanks to vaccination.

Thus, we can even call the latest news very favorable for the British pound. Vaccination, the lifting of quarantine restrictions, the possible curtailment of the economic stimulus program as early as next year, all this can support the British pound in the near future. However, we believe that these factors are 10-20 percent of what currently affects the pound/dollar exchange rate. The trillions of dollars that are being poured into the American economy remain a key factor. But in the case of the pound, the "speculative factor" also works, which is very well seen in the weakness of the global correction against the upward trend in February-March of this year. Recall that the total size of the correction was only 550 points with a 2,800-point increase. The pound, meanwhile, has come close to its 3-year highs and may soon be heading for 6-year highs near the level of 1.5100.

The average volatility of the GBP/USD pair is currently 72 points per day. For the pound/dollar pair, this value is "average." On Thursday, May 20, we expect movement within the channel, limited by the levels of 1.4090 and 1.4234. A reversal of the Heiken Ashi indicator to the top may signal a resumption of upward movement.

Nearest support levels:

S1 – 1.4160

S2 – 1.4130

S3 – 1.4099

Nearest resistance levels:

R1 – 1.4191

R2 – 1.4221

Trading recommendations:

The GBP/USD pair started to adjust on the 4-hour timeframe. Thus, today it is recommended to open new buy orders with the targets of 1.4191 and 1.4234 after the reversal of the Heiken Ashi indicator up. Sell orders should be opened if the pair's quotes are fixed below the moving average with targets of 1.4069 and 1.4038.