Ways of central banks are diverging, making the dollar weaker

05 May 2023 206
Ways of central banks are diverging, making the dollar weaker

The British pound continues to strengthen against the dollar. Its dynamics correlate with the dollar index, which includes a package of different currencies. However, the British pound shows an acceleration of upward movement, while the dollar index does not yet. The pound may rise in the near future, thanks to hints from global regulators about changes in the key rate trajectory.

 

This week there were two meetings of the U.S. and Eurozone central banks.

United States Fed Chairman Jerome Powell announced a potential pause in the tightening of the country's monetary policy. The Fed's future decisions will be based on a combination of economic data and credit conditions, Powell said.

ECB President Christine Lagarde said that the European Central Bank will continue pushing the inflation down to the target level of 2%. This means a further increase in interest rates. According to Lagarde, the ECB has made significant progress by raising interest rates actively during the last nine months. However, inflation is still a serious risk. Therefore, a pause in monetary tightening by the Central Bank is not expected in the near future. Lagarde did not specify the level of interest rates increase by the regulator.

 

Thus, the two central banks are going separate ways. The ECB is forced to raise its key rate longer because of higher inflation. The Fed is stopping the rate hike or will even begin to lower it. As a result, the dollar will weaken against all major currencies of developed countries.

The Bank of England, in turn, will have a meeting on May 11. The regulator will also be prepared to tighten its policy, just like the ECB. The inflation in Great Britain is much higher than in Europe. In March it was 10.1%.

 

According to the technical analysis, the British pound went up from the rectangle and formed an uptrend. There is actually no resistance for further growth. The growth target might be the 1.618 Fibonacci level of the last correction wave, which corresponds to the price of 1.286. Stop-loss can be set at the break down of the uptrend at 1.245

 

GBP/USD currency pair growth:

Take profit – 1.286

Stop-loss – 1.245

This content is for informational purposes only and is not intended to be investing advice.

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