Pound will return to growth after a strong pullback

21 July 2023 212
Pound will return to growth after a strong pullback

For the past week, the GBPUSD currency pair has been pulling back down from the 15-month high set slightly above 1.314. Yesterday the prices hit the 1.284 level, which matches the June tops, and the decline stopped there. Today the pound buyers are trying to recover some of the positions lost in recent days. There is still no full confidence that the GBPUSD correction is over, but a precise set of long positions already looks like an interesting strategy.

A strong decline in the pound was triggered by UK inflation statistics released on Wednesday. Price growth slowed from 8.7% to 7.9% in June against an anticipated 8.2%. Market participants immediately lowered expectations for the peak rate, which will be reached by the Bank of England at the end of its monetary tightening cycle. Now the forecasts do not assume that the key rate will exceed the level of 6%. But it seems that these traders' actions were somewhat premature.

Retail sales data published today brings fears of higher inflation in the UK back to the forefront. On a month-on-month basis, retail sales rose by 0.7% after the lowest increase of 0.1% in May. The forecasts suggested a more modest increase of 0.2%. Although the comparison with the previous year is much less optimistic (in June the decline slowed down from -2.3% to -1%), the pound exchange rate gained a strong support in any case.

The Fed meeting will be held next week, while the Bank of England will make its decision on interest rates only on August 3. Due to this, the pound may remain weak against the dollar in the coming days, and the GBPUSD pair’s return to growth is unlikely before the end of July.

While the GBPUSD pair is under pressure, there is a good chance to take long positions at attractive prices. From this point of view, the 61.8% Fibonacci retracement level (1.28) is of interest. There is a high probability that bulls will become active near this level and GBPUSD will reverse upwards.

The following trading strategy may be offered:

Buy GBPUSD at declining to the range of 1.28-1.284. Take profit 1 – 1.2865. Take profit 2 – 1.293. Stop loss – 1.275.

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

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