FX.co ★ GBP/USD. Friday's test for the pound: the key report of the week is able to redraw the fundamental picture

The pound paired with the dollar is taking advantage of the moment: the British currency is gaining momentum amid the general weakening of the greenback, trying to settle within the 22nd figure. Wednesday's release of data on the growth of US inflation puzzled market participants and significantly redrawn the fundamental picture in many dollar pairs. The pound was under background pressure on Tuesday, trying in vain to overcome the resistance level of 1.2100. The results of the Bank of England's August meeting alerted investors: despite the rate hike by 50 points at once, the central bank voiced very pessimistic estimates, predicting a recession of the British economy from the fourth quarter of this year. Such gloomy prospects offset the optimism associated with a 50-point increase in the rate. The pound, paired with the dollar, drifted, regularly making phlegmatic attempts to conquer the 21st figure.

However, the "black swan" in the form of the US CPI provided unexpected support to GBP/USD bulls. The US dollar index fell sharply on Wednesday (from 106.31 to 104.53), reflecting the "big sell-off" of the greenback across the market. US inflation has shown the first signs of slowing down, significantly weakening hawkish expectations about the Federal Reserve's further actions. Whereas last Friday, the market mood was completely different: after the release of strong Non-Farms, the probability of a 75-point rate hike at the September meeting increased to 68%. The dollar was "on the horse" again, and the GBP/USD pair fell to 1.2002.

The latest report on the growth of the US consumer price index changed the situation dramatically. A sharp slowdown in inflation indicators (especially the core CPI) weakened the dollar throughout the market, including in pairs with the pound. The probability of implementing the 75-point scenario has significantly decreased, which is why dollar bulls have lost an important trump card of a fundamental nature.

However, the GBP/USD pair can develop an upward trend not only due to the weakness of the US currency. The fact is that key data on the growth of the national economy will be published in the UK on Friday. And if it turns out to be in the green zone, the pound will receive significant support, taking into account the results of the BoE's August meeting.

Let me remind you that the British central bank at its last meeting voiced very pessimistic assessments regarding the further growth of the British economy. The announced macroeconomic forecasts made market participants think about the question: at what pace will the BoE be able to tighten monetary policy in a recession that should begin in the fourth quarter of this year and, according to the announced forecasts, will last more than a year?

GBP/USD traders quite reasonably doubted that the central bank would maintain the "sporty pace" of rate hikes, even despite the continued growth of inflation indicators. The central bank itself commented on the future prospects very vaguely. The central bank indicated that "the central bank committee will determine the appropriate rate level based on estimates of the economic forecast and inflationary pressure by members of the Bank of England."

Given such ambiguous results of the August meeting, Friday's release will play a special role for the British currency.

According to preliminary forecasts, the volume of UK GDP in the second quarter will increase by only 2.8% (an increase of 8.7% was recorded in the first quarter). On a quarterly basis, the indicator should go into negative territory altogether, falling to -0.2%. If we talk about monthly growth, then a sad picture is also expected here: according to forecasts, in June the British economy shrank by 1.2% on a monthly basis and by 0.2% on a quarterly basis.

Also, the indicator of industrial production growth should come out in the negative area: according to most experts, in June it decreased by 1.3% (m/m) after an increase of 0.9% in May. Negative dynamics is also expected in the processing industry: the volume of production here has decreased, according to forecasts, by 1.9%. Similarly, the indicators of the service sector, as well as the construction sector, should be "in the red".

As we can see, the announced forecasts are pessimistic in nature, and they are consistent with the forecasts of the BoE economists. Therefore, the British currency's succeeding behavior will largely depend on the results of Friday's release. If the real numbers turn out to be even worse than the forecasts, the pound will weaken throughout the market – and, most likely, paired with the dollar, even despite the weak positions of the latter. But the "green color" of Friday's release, on the contrary, will spur the upward corrective trend. In this case, the GBP/USD pair will not only overcome the resistance level of 1.2280 (the upper limit of the Kumo cloud on D1 coinciding with the upper line of the Bollinger Bands), but will also settle within the 23rd figure. Given such uncertainty, it is impractical to open trading positions (both short and long positions) before the release of Friday's data. The pendulum can swing both in favor of the pound and against it, so it is best to stay out of the market before the release of the key report.