FX.co ★ GBP/USD. Careful, correction!

The GBP/USD pair has updated two-year price lows on Tuesday, reaching 1.1716. The price declined below this target only in March 2020, when the pound felt the first blow of the coronavirus crisis. To date, the downward dynamics is due to a whole set of circumstances. Among them, there are several main ones: the growth of hawkish expectations about the Federal Reserve's further actions; simultaneous skepticism about the hawkishness of the British central bank; the energy crisis in Europe; increased risks of stagflation in the UK.

Almost all of the above factors are intertwined with each other, forming, nevertheless, a fairly complete fundamental picture. Its essence lies in the fact that the future prospects of GBP/USD will depend solely on the well-being of the US currency - the pound is unlikely to be able to seize the initiative for the pair in the near future.

The pair's behavior is eloquent, illustrative. Just a few hours after the GBP/USD bears updated the two-year price low, the pair soared up, rising by almost 150 points. The reason for the upward momentum was the macroeconomic reports that were published in the United States. For example, traders were disappointed by the release of data on the growth of the PMI index in the service sector. The indicator collapsed to 44 points, with a modest growth forecast of up to 48 points. This is the weakest result since May 2020. The index of business activity in the US manufacturing sector was also in the red zone, falling to 51.3 points (the worst value since July 2020). The American real estate market was also disappointing: the volume of home sales in the primary market decreased in July by 12% at once (with a forecast of a decline of 3%). A kind of cherry on the cake was the index of manufacturing activity from the Fed Bank of Richmond, which also turned out to be in the negative area, coming out at -8 points (with a forecast of a decline to -3 points).

In other words, the block of macroeconomic reports, which was published ahead of the economic symposium in Jackson Hole, put significant pressure on the greenback. The greenback has noticeably sunk in all pairs of the "major group". The pound paired with the dollar, which was trying to develop a modest corrective growth in the first half of the day, shot up to 1.1876 (let me remind you that the daily low was fixed at 1.1716).

Perhaps this is all you need to know about the "reliability" of short positions on the GBP/USD pair.

Indeed, the British currency looks vulnerable now: the pound is not able to play its game, and is not able to reverse the onslaught of dollar bulls. After all, the energy crisis, which is the number one topic for European countries, is also relevant for the countries of Great Britain. According to Citibank analysts, due to the increase in gas prices, inflation in Britain will reach almost 19% in winter (this is the highest value since 1979). The upper limit of payment for electricity for the average household in the country at the beginning of 2023 may jump to 4.5 thousand pounds (per year). For comparison, we can say that at the moment this indicator is in the region of 1900-2000 pounds. It is obvious that the abrupt inflationary growth will reduce the purchasing power and consumer activity of the British. This will inevitably lead to an economic downturn, which has already begun to be felt in the second quarter of this year. In such circumstances, it will be extremely difficult for the British central bank to tighten monetary policy at an aggressive pace.

The pound looks vulnerable amid such prospects, especially when paired with the dollar, which (so far) has the Fed as "allies". But the fact is that the greenback itself is growing thanks to the "air locks" that appeared as a result of hawkish statements by some representatives of the Fed. In particular, James Bullard recently announced that he is ready to support a 75-point rate hike at the September meeting. The head of the San Francisco Fed, Mary Daly, said that next month "it would be appropriate" to increase the rate "by 50 or 75 basis points." Her colleague, Esther George, also did not rule out the implementation of this scenario.

Thanks to these messages, the probability of a 75-point rate hike in September has increased again. For example, CME FedWatch data suggests that the futures segment with a probability of 54% assumes an increase in the rate by 75 basis points. Whereas there is a 46 percent probability, respectively, in favor of a 50-point rate hike.

The rise of hawkish sentiment increases the significance of Fed Chairman Jerome Powell's rhetoric. If on Friday he unexpectedly cools the ardor of dollar bulls (focusing on the slowdown in the growth of the consumer price index), the greenback will again be under pressure. It's not for nothing that today the foreign exchange market reacted so violently to the published block of American statistics. In my opinion, in this case, it was not the figures themselves that disappointed, but the possible reaction to them from the head of the Fed.

In other words, an alarm bell sounded for the GBP/USD bears. The market has made it clear that the dollar rally may end quickly and ahead of schedule if Powell does not support the greenback with his hawkish attitude.

In conditions of such uncertainty, it is advisable to stay out of the market. The sharp upward pullback that we observed on Tuesday indicates the unreliability of short positions. It is also too early to talk about long positions: the dollar can still prove itself (again, at the expense of Powell), and the pound is not able to organize a large-scale counteroffensive.