The events of recent days were able to shake the pound, which has updated the high since the beginning of June. However, GBP/USD bulls failed to take the important resistance at 1.2600. Will the dollar allow itself to gain the upper hand in the conditions of an aggressive Federal Reserve and a sluggish Bank of England (BoE), which is set to disappoint traders next week?
The British currency was supported by the political events of the country. Boris Johnson managed to stay in the prime minister's position, but he may continue to be criticized. A short-term reaction of the foreign exchange market to such news is quite possible. The key role in the pound's movement is not played by politics at all, traders are interested in completely different issues. The main driver in the near future is likely to be monetary policy and the BoE meeting next week.
In this regard, macroeconomic statistics are of interest to the markets. The composite PMI fell to 53.1 points in May, which turned out to be better than the forecasts of 51.8 points. The index of business activity in the construction sector reached 56.4 in May compared with the forecast of 56.6. The value of the services sector sank to 53.4 points, while the markets expected a decline to 51.8 points.
The indicators are ambiguous, however, market players still have a lot to worry about. A slowdown in economic activity in key sectors of the UK economy, together with a continued increase in inflation, may cause a recession. This prospect is becoming more and more real.
The BoE's June meeting could be extremely disappointing for the markets. Interest rate expectations have increased recently, but it is unlikely that the central bank will be able to justify them. A pause in the tightening of monetary policy will put the strongest pressure on the pound. It is unlikely that any information will appear before June 16. Markets, apparently, will begin to prepare for the worst outcome.
Below the 1.2500 level, 1.2480 acts as a key support. If the quote goes below this level and starts using it as resistance, it may target 1.2420, and then the psychological level of 1.2400.
Strong resistance formed at 1.2550. Closing higher may attract bulls who will break through the 1.2600 level.
The rising dollar also plays against the pound's positions. The movement of the GBP/USD pair will mainly depend on incoming information from the US, where, unlike in the UK, the Fed is still planning to tighten policy next week.
In addition, the increase in the yield of treasuries was more than 1%, the indicator exceeded 3%, which gives the dollar an advantage and allows it to bypass competitors. Judging by the movement of the dollar index, bulls of the US currency again aimed for the 103 level for starters.
Credit Suisse economists expect aggressive growth of the dollar, and the recent decline is called nothing more than a corrective decline. Above 103.93, the index will confirm its intention to return to the high of the current cycle of 105. After a clean breakthrough of this mark, the indicator will go on the offensive. The area of 109.25-110.25 may be conquered in the medium term.
Given the future prospects of the dollar, short positions on the GBP/USD pair will resume. The BoE meeting and the impending recession will worsen the pound's situation.
Investors are considering a recession not only in Britain, but also in the United States. However, the consequences for the national currency will be different.
According to the latest monthly Bloomberg survey, the probability of a recession in the US over the next 12 months is 30%. This is the highest figure since 2020. Compared to last month, it also increased, in April the probability of such an event was 27.5%.
The Macro Hive recession model now assigns a 43% probability of a recession in the US over the next 12 months.
The increased expectations of the recession occurred during the period of the dollar's decline, however, HSBC analysts do not link these components together, calling the depreciation a technical correction. Further, the recession should actually support the dollar.
"If the market is concerned about the risks of a possible recession in the US, it should buy the dollar, not sell it. In most cases, this is supported by the performance of the dollar during economic cycles from peak to recession in America," the economists write.
The conclusions were made in the face of renewed purchases of the dollar, which, according to analysts, is associated with ongoing market fears that the central bank's interest rate hike will continue to slow down global economic growth. As a result, the demand for the dollar as a safe haven will grow stronger.