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GBP/USD. COVID-factor "loosened its grip", but longs are still risky
17:44 2021-07-27 UTC--4
Exchange Rates analysis

The pound-dollar pair is at the mercy of the US currency – like all other dollar pairs on the eve of the next Federal Reserve meeting. The contradictory information flow exerts background pressure on the greenback, which scares investors. The trading principle of "buy on rumors, sell on facts" does not work in this case – traders do not buy and do not get rid of the dollar, taking, in fact, a wait-and-see position. The pound tried to organize an independent game against the background of a decrease in the incidence of coronavirus in Britain, but dollar bulls did not allow the British to develop an upward trend.

In general, the situation for the pair is shaky: on the one hand, we have the hawkish expectations of traders regarding the results of the July meeting of the Fed, on the other hand, the weakening of the COVID factor, which exerted significant pressure on the GBP/USD pair. On the wave of unexpected optimism, the bulls returned to the area of the 38th figure, even despite the strong positions of the greenback. However, if we consider the medium-term prospects of the pair (and even more so-long-term), then everything will depend on the behavior of the US currency, the well-being of which, in turn, will depend on the results of the next Fed meeting.

Let me remind you that the epidemiological situation in Britain significantly worsened in July. Coincidentally, the authorities weakened the quarantine as much as possible during the surge in the incidence of coronavirus. Moreover, in 95 percent of cases, we are talking about the Indian strain – the delta variant of Covid - which is more contagious and dangerous. For example, the week before last, more than 50,000 daily cases of coronavirus were registered in the country for the first time since mid-January. This is not far from the record high – the largest number of daily cases recorded in Britain was 68,053 (January 8). For comparison, it should be noted that the daily increase was at the level of 3-5,000 in early June, at the level of 7-10,000 in mid-June, at the level of 12,000 at the end of June, and so on. The peak was recorded on July 17, when 54,000 Brits were diagnosed with the disease during the day.

Then the incidence curve began to gradually slope down. For example, yesterday British doctors reported the detection of 24,000 infected people. Such a result is still far from ideal – but the dynamics themselves are important here, which is clearly of a downward nature. The experts also drew attention to another important fact. Despite the fact that the number of new cases of infection has increased by almost 70%, the number of hospitalizations and deaths remains abnormally low. The high coverage of adult vaccination (at the moment, almost 70% of British adults are fully vaccinated) has fundamentally changed the situation compared to the first and second waves of the pandemic. Against the background of a large number of daily cases of infection, a low burden on hospitals and low mortality are recorded. In addition, according to experts, the main increase in cases occurred at the expense of young people aged 20-30 years. As is known, among this age group, there is a much less need for hospitalization and relatively rare cases of death. All these trends suggest that Britain will be able to avoid repeated lockdowns in the autumn and winter – while it was these fears that put pressure on the pound.

As you can see ,the coronavirus factor has weakened its influence at the moment, allowing GBP/USD bulls to move away from multi-month lows and update the local high at 1.3830.

At the same time, long positions on the pair are risky. The fact is that the Bank of England still voices a dovish position, even allowing for a reduction in the interest rate. In particular, the representative of the British central bank, Catherine Mann, who will join the Monetary Policy Committee from September 1 (replacing Gertjan Vlieghe), recently voiced extremely dovish rhetoric, ruling out tightening the parameters of monetary policy. She assured journalists that inflation will show a downward trend next year, so it is impossible to talk about hawkish decisions at the moment. In her opinion, the BoE should follow one of the ways: to reduce the rate to the negative area or to extend QE. At the same time, she made it quite clear that she was in favor of the first proposed option. Other representatives of the BoE, in particular Jonathan Haskel and Ben Broadbent, also opposed the tightening of monetary policy parameters. And although they did not lobby for the idea of lowering the rate to the negative area, their positions are also dovish in nature. For example, Haskel said that the risk of a" preventive " tightening of monetary policy continues to outweigh the risk of a temporary period of inflation above the target level. Broadbent similarly advocated maintaining the current parameters of monetary policy.

Thus, the fundamental picture for the GBP/USD pair may change very soon. Traders' emotions about the improvement of the epidemiological situation in the UK will come to naught, and completely different fundamental factors will come to the fore. So, if tomorrow the Fed hints at a possible curtailment of QE already within the current year, the dollar will receive significant support throughout the market – even against the pound. In this case, the uncorrelation of the positions of the Fed and the BoE will be more pronounced, putting pressure on the GBP/USD.

That is why long positions on the pair are now risky, despite the upward surge. At the moment, it is most expedient to take a wait-and-see attitude, waiting for the announcement of the results of the July Fed meeting. If Fed Chairman Jerome Powell tightens his rhetoric and at least does not rule out the option of an early curtailment of QE, the GBP/USD pair can safely go into shorts, focusing on the support level of 1.3660 in the medium term (the lower line of the Bollinger Bands indicator on the daily chart). Otherwise, further price growth is possible, but this growth is limited by the resistance level of 1.3900 (the upper line of the Bollinger Bands on the same timeframe).

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