FX.co ★ GBP/USD: The pound dances to the tune of the dollar

The British pound is driven by the global risk appetite and the Fed's intention to normalize monetary policy, and not by its own macroeconomic statistics. Weak data on inflation and retail sales in the UK did not scare the "bulls" for GBP/USD, and the disappointing business activity report from Markit allowed them to launch a counteroffensive. However, all this is just talk in favor of the poor. The pair collapsed to a 5-week low amid growing investor interest in the US dollar, which, however, may quickly fade.

The third consecutive slowdown in the composite purchasing managers' index was added to the fall in the inflation rate to 2% and the reduction in retail sales in July by 2.5%, which was the most serious decline in the indicator since January, when the whole of Britain was sitting on isolation. Business activity collapsed to 55.3 in August, the lowest since February. Its current values are still higher than before the pandemic, but they increase doubts about the same rapid GDP growth in the UK in the third quarter as in the second. On the other hand, the leading indicators, including visits to shops and restaurants, indicate that the economic recovery continues.

Dynamics of leading indicators in Britain

The reaction of GBP/USD to the UK macrostatistics convinces that the US dollar is the leader in the pair. For most of August, it grew due to the high demand for US securities from non-residents, the status of a safe haven asset, and the Fed's readiness to normalize monetary policy.

Indeed, despite weak statistics on retail sales, consumer confidence, the real estate market, and slowing inflation, which resulted in a drop in the US economic surprise index, the USD index continued its way upward. This was facilitated by the growing appetite for safe-haven assets against the background of the deteriorating epidemiological situation in the world and falling commodity prices.

Dynamics of USD indices and economic surprises in the USA

For the time being, the rhetoric of the FOMC members remained "hawkish". Many representatives of the Federal Reserve spoke about the need to curtail the quantitative easing program by $120 billion per month since it cannot solve supply problems, but it further strengthens demand. That is, it stimulates inflation. On the eve of the meeting of central bankers in Jackson Hole, the opinion of some officials is beginning to change. In particular, the head of the Federal Reserve Bank of Dallas, Robert Kaplan, makes the start of the process of normalization of monetary policy dependent on the spread of the delta variant across the United States.

If other Federal Reserve officials, including Jerome Powell, start talking similarly, investors will reconsider their views on the US dollar, which will lend a helping hand to the "bulls" on GBP/USD.

Technically, there is a pronounced downward trend on the daily chart of the pair. At the same time, a rebound from the resistance at 1.374, where the lower limit of the fair value and the moving average are located, may become a reason for selling sterling against the US dollar. An important point is that the breakdown bar should close below the key level.

GBP/USD, Daily chart