22.05.202310:22 Forex Analysis & Reviews: Pound goes into a pullback

From moderate optimism to euphoria. This is how the mood of British officials can be characterized. Bank of England Governor Andrew Bailey stated that everything looks somewhat better than a couple of months ago. Prime Minister Rishi Sunak painted a bright picture of faster economic growth for the UK than expected at the G7 meeting. He claimed that income statistics have significantly exceeded expectations, and consumer confidence is growing. However, all of this is of little help to GBP/USD. The pair is in a corrective phase towards an upward trend, with no visible end in sight.

Consumer confidence in Britain is indeed growing. In May, the GfK index reached its highest point since the start of the armed conflict in Ukraine. Its positive dynamics reduce the risks of a recession, which seemed almost inevitable at the end of 2022. At that time, consumer confidence hit rock bottom in half a century due to a political crisis over Liz Truss's mini-budget.

Dynamics of consumer confidence in Britain

During those times, the Bank of England forecasted a recession for five quarters. It's not surprising that Bailey is expressing moderate optimism now. Yes, they managed to avoid a downturn, but there is still a lot of work to be done at the BoE. Inflation remains above the 10% mark, leading the money market to believe in a 25 bps increase in the repo rate to 4.75% in June. However, there is hope for positive shifts.

In April 2022, prices in Britain sharply increased due to an energy crisis and increased household gas bills. Meanwhile, the high base effect allows Bloomberg experts to forecast a slowdown in inflation from 10.1% to 8.3% in March. The current figure is twice as high as in the United States and higher than the 6.9% in the eurozone. The Bank of England's 12 acts of monetary restriction have had no significant impact on it. Let's see if the high base will help.

Dynamics of inflation and wages in Britain

In theory, a slowdown in CPI growth is negative for the pound. In such a scenario, the likelihood of a 13th repo rate hike in June will decrease. However, the real yield of British bonds is actually of great importance. If it increases, money will flow into Britain more quickly, providing support for GBP/USD. Additionally, excessively aggressive tightening of BoE's monetary policy would have increased recession risks. A pause in the monetary restriction by the Bank of England would allow the pound to recover.

It is worth noting the busy economic calendar in Britain during the last full week of May. Along with inflation data, business activity and retail sales statistics will be released. They will shed light on whether the economy is really as good as Sunak claims.

Technically, on the GBP/USD daily chart, a rebound towards the bullish trend is gaining momentum. The idea of building short positions on a rebound from resistance at 1.254 has been successful. The pair's inability to breach the fair value near 1.247 is a sign of weakness for the bulls and a reason to sell towards 1.2355–1.236 and 1.23.