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The pound is grasping at straws

The pound is trying to recover from its recent defeat. As soon as the Fed hinted at raising the federal funds rate in 2023 instead of 2024, the GBP/USD bears launched a decisive counterattack. And it does not matter that the Bank of England may tighten monetary policy before the Fed in 2022, this news is already taken into account in the quotes. But the "hawkish" rhetoric of Jerome Powell and his team became a real bolt out of the blue.

No matter how much they say that the reasons for the fall in GBP/USD are the increase in the number of COVID-19 cases in Britain to the highest levels since February, or the decline in retail sales, or the resuscitation of the Brexit topic, the Fed has certainly dealt the main blow to the bulls. Although you should not forget about the disappointment. Accelerated vaccination allowed Reuters experts to expect an expansion of the UK GDP by 6.2% in 2021 and 5.2% in 2022. However, the date of the full opening of the economy according to the timetable set by Boris Johnson will be postponed, thus is shifted from June 21 to July 19. And even though the British Prime Minister says that this is the deadline and that there will be no other postponements, the increase in the number of infections makes this doubtful.

Due to the prolonged lockdown, the expansion of the economy may be slower, which the options market immediately reacted to. The risks of a reversal in the pound after the FOMC meeting, the release of disappointing retail sales statistics, and sad data on COVID-19 infections have sharply gone down, which indicates a "bearish" mood hovering in the market.

Dynamics of pound reversal risks

The pound is grasping at straws

According to the option pricing model from Bloomberg, the probability of GBP/USD falling to 1.2 by the end of the year increased from 10% to 21%. At the same time, the futures market does not expect "hawkish" rhetoric from the Bank of England at the meeting on June 24. Along with the potential slowdown in the recovery of the UK GDP, this circumstance is another disappointment for sterling. In my opinion, its quotes included a factor of a faster start to the normalization of the BoE's monetary policy compared to the Federal Reserve, so the news about a potential increase in the federal funds rate in 2022 provoked a real defeat of the GBP/USD bulls.

Andrew Bailey and his colleagues will probably continue to repeat the mantra about the temporary nature of inflation acceleration. Indeed, the consensus forecast of Reuters experts suggests that consumer prices will accelerate to 2.4% in the fourth quarter, but then their growth rate will begin to decline.

Along with the Bank of England meeting, the release of business activity data, as well as news around the negotiations between Britain and the EU over inspections in Northern Ireland, will be important for the pound in the week of June 25.

Technically, the 1-2-3 and "Splash and Shelf" patterns were implemented on the GBP/USD daily chart. The break of the support at 1.409 allowed the formation of short positions. If the bulls manage to catch hold of the important pivot level 1.383, they will try to form a consolidation. On the contrary, closing below it will allow further selling of the pound against the US dollar.

GBP/USD, Daily chart

The pound is grasping at straws

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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