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The pound took advantage of its status as a risk currency and, watching the rapid rally of global stock indices led by the Americans, closed the first week in the green since mid-January. Thanks to positive corporate reports from chip manufacturer NVIDIA, new record highs were set in the American, European, and even Japanese stock markets. The Japanese market needed 34 years to update its historical peak! However, to continue the GBP/USD rally, it would be good to use its own resources as well.
Seemingly, positive business activity statistics in the UK contribute to this. The composite purchasing managers' index (PMI) soared to the highest level in nine months in February, soothing the wounds of GBP/USD bulls. The rise in PMI is facilitated by the recovery of real household incomes and more favorable financial conditions than before.
Business Activity Dynamics in the UK
Positive business activity dynamics allowed pound enthusiasts to recover from the shock associated with the fact that the UK economy slipped into a recession in the second half of 2023. However, BoE Governor Andrew Bailey stated before Parliament that it was a very minor economic downturn. It is unlikely to continue and trigger a rate cut in the repo rate earlier than the markets currently expect.
Derivatives give a 50% chance of the Bank of England starting monetary expansion in June. However, they are 100% confident that the ECB and the Fed will take their first steps in this month. The BoE's sluggishness plays in favor of the pound. It is precisely because of this that the British pound is the main competitor to the U.S. dollar in the currency race of the Big Ten.
At the same time, based on one PMI report, it cannot be said that the UK economy has emerged from the woods, declared the end of the recession, and will steadily grow. On the contrary, the path to recovery is not easy. This is evidenced by the first decline in British consumer sentiment in four months. Before that, the indicator was at a two-year high. Perhaps, in the face of high inflation, early optimism is waning.
The successes of GBP/USD could have been more significant if Federal Reserve officials had not tried to shift expectations for the start of monetary expansion to a later period. Federal Reserve Vice Chair Philip Jefferson and New York Fed President John Williams expressed that it is not worth raising the federal funds rate before the end of the year. If the market follows them and shifts expectations from June to September or even later, the U.S. dollar may win the currency race of the Big Ten in 2024.
Technically, on the daily chart of GBP/USD, an inside bar with a long lower shadow was formed. Breaking its low at 1.2645 could be the basis for selling the pound against the U.S. dollar. On the contrary, a successful assault on resistance at 1.27 will allow traders to increase the long positions formed earlier from the level of 1.2635.
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