The British pound might continue falling: this possibility is supported by several fundamental and technical factors. Aggressive policy of the US Fed and the expected growth of the dollar will make the pound retreat faster than it is doing now.
Speeding-up inflation and the growth of the interest rate in Britain will only augment the pressure. The situation could improve if all coronavirus restrictions were cancelled all over Britain. However, judging by how the situation around the Omicron strain is developing worldwide, it would be too early to relax yet.
Monetary policy
In December 2021, the Bank of England raised the interest rate for the first time in 3.5 years. The rate grew to 0.25% from 0.10% annually. The decision was made because of inflation reaching 10-years high. The British CPI reached 5.40%. This means the regulator will have to keep acting to rein in inflation. As long as the official forecast of the BoE suggests growth of the CPI to 6% by April 2022, this means the interest rate is going to grow again in the nearest future, this time, probably, by 25 base points.
High inflation is a great problem. And if it does not get under control soon, it will influence the pound even worse.
Current situation with COVID-19
In January, Prime Minister Boris Johnson announced the end of all coronavirus restrictions. Working from home, COVID certificates, obligatory masks – all this is becoming past. We do not only know whether for long or not. If there is an outbreak of a new strain all over the world, London is not likely to step aside. Britain is counting on collective immunity and vaccination, which seems wise. Time will show whether this works.
For the pound, pandemic complications might augment the already existing stress.
Tech analysis of GBP/USD
The technical picture of the British currency is also somewhat negative. The GBP/USD currency pair is pushing off the resistance level at 1.3705. The current price pattern on W1 looks very much like a bearish 5-0 pattern. In most cases, a bounce off the upper border of such a pattern predicts the development of a decline with the goal below the local low. Hence, in the nearest future GBP/USD quotations can fall to 1.3005. A strong support level in this way is 1.3405-1.3305. These are very important levels, and a confident breakaway will open a pathway to a strong descending momentum.
Sellers need maximum effort – otherwise a bounce upwards can lead to the appearance of an inverted Head and Shoulders pattern. If so, do not hurry because the reversal pattern is just forming, and it will end by a breakaway of the Neck and securing above 1.3765.
On H1, the quotations are correcting after a decline but remain in a descending channel. The nearest resistance level is at 1.3520, and buyers are pushing the price to this area. A bounce off the upper border of the bearish channel will give a good signal for further decline with the potential goal of 1.3345.
Closing thoughts
Summing up, I would say that the medium-term trend in the pair is bearish. The quotations have successfully pushed off 1.3745, at the upper border of the descending channel, which means that, regardless of the correction, buyers still do not have enough strength to break the current trend. In the nearest future, the pair can test the area of 1.3405-1.3305; a breakaway of these levels will mean further falling a possible test of December levels.
By Dmitriy Gurkovskiy, Chief Analyst at RoboForex
