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British pound: in a bear trap

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British pound: in a bear trap

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The British pound could continue to fall: this possibility is supported by several fundamental and technical factors. The aggressive policy of the US Fed and the expected growth of the dollar will cause the pound to decline faster than it is currently.

Accelerating inflation and rising interest rates in Britain will only increase the pressure. The situation could improve if all coronavirus restrictions are rolled back across Britain. However, judging by how the situation around the Omicron strain is developing around the world, it would still be too early to relax.

Monetary Policy

In December 2021, the Bank of England raised the interest rate for the first time in 3.5 years. The rate went from 0.10% to 0.25% per year. The decision was made due to inflation reaching a 10-year high. UK CPI hit 5.40%. This means that the regulator will have to continue to act to contain inflation. As long as the BoE’s official forecast suggests CPI growth of 6% by April 2022, that means the interest rate will rise again in the near future, this time probably by 25 basis points. .

High inflation is a big problem. And if it is not brought under control soon, it will influence the pound even more.

Current situation with COVID-19

In January, Prime Minister Boris Johnson announced the end of all coronavirus restrictions. Working from home, COVID certificates, mandatory masks – all of that is becoming a thing of the past. We just don’t know whether for long or not. If there is an outbreak of a new strain anywhere in the world, London is unlikely to pull out. Britain is relying on herd immunity and vaccination, which seems sensible. Time will show if it works.

For the pound, pandemic complications could increase already existing stress.

GBP/USD Technical Analysis

The technical picture of the British currency is also somewhat negative. The GBP/USD currency pair pushes back the resistance level at 1.3705. The current price pattern on W1 looks very much like a 5-0 bearish pattern. In most cases, a bounce off the upper boundary of such a pattern predicts the development of a decline with the target below the local minimum. Therefore, in the near future GBP/USD quotes may fall to 1.3005. A strong support level in this way is 1.3405-1.3305. These are very important levels, and a confident breakaway will set the stage for strong downward momentum.

Sellers need maximum effort – otherwise a bounce up can cause an inverted Head and Shoulders pattern to appear. If so, don’t rush as the reversal pattern is forming and it will end with a breakout from the neck and securing above 1.3765.

British pound: in a bear trap

 | News Today

On S1, quotes correct after a decline but remain in a descending channel. The closest resistance level is at 1.3520, and the buyers are pushing the price towards this area. A bounce off the upper boundary of the downtrend channel will give a good signal for further decline with the potential target at 1.3345.

British pound: in a bear trap

 | News Today

Final Thoughts

In summary, I would say that the pair’s medium-term trend is bearish. Quotes managed to push back 1.3745, at the upper edge of the descending channel, meaning that whatever the correction, buyers still don’t have enough strength to break the current trend. In the near future, the pair may test the 1.3405-1.3305 area; a breakout from these levels will mean a further drop in a possible test of December levels.

By Dmitriy Gurkovskiy, Chief Analyst at Forex robot

British pound: in a bear trap

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