GBP/USD – Smart Money Analysis: Inflation Supports the Pound

The GBP/USD pair continues to rise, which I consider completely justified. Reports on the U.S. economy, labor market, and inflation have effectively settled the debate over whether the FOMC will raise interest rates in September. Nonfarm Payrolls declined for the fourth consecutive time and fell below zero. The U.S. economy is slowing. Inflation is declining. The situation may change based on the August data, but at present, the FOMC is much closer to maintaining a wait-and-see stance than to making hawkish decisions. As for the Bank of England, the probability of monetary policy tightening by the end of the year has increased following the July inflation report. Inflation accelerated, albeit slightly, and this acceleration could mark the beginning of a new trend.

Do the bears have any prospects at present? In my view, no. I mentioned in previous articles that the liquidity sweep from the July 15 high did not look convincing, while bullish Imbalance 26 serves not only as an area of interest for the bulls but also as a support zone for the price. A new buy signal may form today, which would only increase buying pressure. The bears currently have neither a pattern nor a signal.

As I mentioned earlier, geopolitics is no longer having a favorable impact on the dollar, as negotiations between the United States and Iran have effectively stalled. Officially, Tehran is negotiating only with Oman. It remains unclear what these negotiations will lead to in terms of ending the conflict and reopening the Strait of Hormuz. Iran may manage to agree with Oman on the terms for controlling the Strait of Hormuz, but how would that resolve the conflict with the United States and end the U.S. blockade of the strait?

This week, oil prices rose to $93 per barrel and, in my view, could return above $100 in the near future if the Strait of Hormuz remains closed. In that case, inflation in the United States or the United Kingdom would begin accelerating again. If the conflict is resolved, however (how?), oil prices could return to the $60–70 per barrel range. In that case, the Fed may not need to tighten monetary policy, while the Bank of England is not currently burdened by the problem of high inflation. At present, however, the Fed is the one unable to take a hawkish step, while the Bank of England, conversely, is prepared to tighten monetary policy if inflation begins to accelerate. This is the key difference. Therefore, in my view, the pound currently has a certain advantage over the dollar.

The chart analysis shows a new bullish advance. At present, traders have three bullish imbalances (24, 25, and 26), within which buy trades can be considered. Imbalance 24 has already produced a bullish signal that traders could have acted on. Imbalance 25 remains untested. Imbalance 26 may generate a buy signal today. There are currently no bearish patterns. Therefore, traders can continue to hold their long positions open and wait for the reaction to Imbalance 26 to confirm the continuation of the current bullish trend. The liquidity sweep from the July 15 high will most likely prove false. I suggest considering it only if Imbalance 26 is invalidated.

The economic backdrop on Wednesday supported the bulls. Inflation accelerated slightly, bringing the Bank of England closer to monetary policy tightening. We are unlikely to see a rate hike in September, but what matters here is the probability and how close the regulator is to one decision or the other. In my view, the chances of a Bank of England rate hike by the end of the year are even higher than the chances of an FOMC rate hike.

The overall fundamental backdrop remains such that, in the long term, I cannot expect anything other than a decline in the U.S. currency. The war between Iran and the United States has not changed this either. Nor has the possibility of Fed rate hikes in 2026. Geopolitical developments prompted the market to remember the dollar's safe-haven status for several months, but the conflict has already passed its active phase. The chances of FOMC monetary policy tightening have declined substantially in recent weeks, putting pressure on the U.S. currency. Therefore, in my view, any dollar advance is temporary and short-lived. I see no reason for a new bearish advance.

On August 20, the economic calendar contains two entries, neither of which is important. The economic backdrop may have no impact on market sentiment on Thursday.

The long-term outlook for the pound remains bullish. After liquidity sweeps from the two most recent swings and the formation of a series of buy signals, the bulls began an advance that is still continuing. I currently see no grounds for a bearish attack, as there are no bearish patterns or signals. The bulls received a buy signal from Imbalance 24, which remains valid. A new buy signal may form today at Imbalance 26. The target for the pound's advance is the May 1 high at 1.3656, which is approximately 100 pips away. I suggest considering the liquidity sweep of the 1.3557 swing only if Imbalance 26 is invalidated.