GBP/USD Secures Best Week in 2021, All Eyes on BoE’s August Meeting

GBP/USD Secures Best Week in 2021, All Eyes on BoE’s August Meeting

The GBP/USD pair ends July higher thanks to the pound’s best week since the beginning of the year. The pair closed on Friday, July 30, at 1.3908, following a slight correction from 1.3983 touched earlier the same day, which was the highest level in over a month.

The currency pair rose 1.14% over the week and 0.59% since the beginning of the month. The last week of July was imperative for the British currency, as it has managed to bounce back and end the bearish mood that had been dominating for over six weeks, during which the pair fell from 1.4250 on June 1 – the highest since 2018 – to the bottom at 1.3572 touched on July 20, which was the lowest since February this year.

While the pound had its best week in 2021, the greenback has recorded the worst week since May. The dollar has been under pressure due to the vague rhetoric of the Federal Reserve, which can be interpreted as a dovish tone, as well as somewhat disappointing GDP data released by the US Government on Thursday.

Elsewhere, the sterling has been supported by a significant decline in COVID-19 cases, even though they are still high, and the reopening of the British economy.

Fundamentals that Moved GBP/USD

The pound versus dollar pair used to be dominated by bears since the start of June. The pair managed to reverse the downtrend on July 20, shortly after Britain launched its grand reopening in spite of the surging number of COVID-19 cases caused by the rapid spread of the Delta variant. Here are the main fundamentals that have influenced the pair:

UK Is Reopening its Economy (***)

On Monday, July 19, England and Scotland lifted almost all major restrictions in an effort to get the economy back on track. As of today, more than 70% of Britain residents are fully vaccinated against COVID-19.  

To keep the situation under control, UK’s National Health Service developed a contact tracing app that pings people and tells them to quarantine, though there is currently no legal requirement for UK citizens to self-isolate based on the recommendations of the app, which uses Bluetooth technology to identify those who might be at risk.

Even though July 19 was dubbed ‘freedom day’, as England ended all legal, social, and economic restrictions that had been held for months, many health experts are calling UK Prime.

Minister Boris Johnson’s decision unethical given the surging number of cases that reached a peak on July 20. 

Meanwhile, on July 28, the UK said that starting with August 2, fully vaccinated travelers from the US and European Union nations no longer have to quarantine. The move will support airlines and travel businesses.

UK COVID Cases Drop 33% Over Last Week (**)

Interestingly, the number of daily COVID cases hit over 46,000 on July 20, which was the highest since mid-January, but they have declined dramatically since then, even though restrictions were lifted. This has been another major factor that supported the pound during the last week of the month.

The UK reported 26,144 new COVID cases on Saturday, July 31, suggesting that the decline in cases between July 25 and July 31 stood at 33% compared with the previous week.

US Fed Sends Dovish Signals (***)

On the other side of the Atlantic, the Federal Reserve left the interest rate unchanged at 0.25% on Wednesday, following the Federal Open Market Committee’s (FOMC) two-day meeting – a decision that everyone anticipated. However, the Fed failed to specify when and how it intends to reverse its quantitative easing program under which it buys $80 billion of Treasuries each month, along with $40 billion of mortgage-backed securities.
It seems that the central bank might be concerned with the slow recovery in the labor market and may need more time than expected to reduce the bond-buying program.
All in all, the Fed’s statement put pressure on the US dollar, which declined against majors like the pound. Still, on Friday, the USD recovered some of the losses after St. Louis Federal Reserve President James Bullard stated that the central bank should start reducing its bond purchases this fall and cut them “fairly rapidly” so the program ends in the first months of 2022.
US Releases Disappointing GDP Data (***)
The US Commerce Department said that the gross domestic product (GDP) grew at an annualized 6.5% in the second quarter. While this is an improvement compared to the 6.3% growth seen in the first quarter, the reading was way below the 8.5% growth expected by analysts.
GBP/USD: Technical Analysis
The GBP/USD pair used to move inside an ascending channel starting with July 21, but the US dollar was much stronger on the last trading day of the month, prompting the pair to break below the channel’s support line.

Meanwhile, the Relative Strength Index (RSI) and the MACD indicators provide neutral signals.

The current rate near 1.3900 is a key psychological level. If the price manages to break below this support, it can go down to 1.3766.

GBP/USD Outlook

The technical analysis indicators are quite neutral on H4 charts, and the price hasn’t formed any meaningful patterns so far. Thus, it is difficult to understand where the pair is heading next week and month. Under the bullish case scenario, the correction that pushed the price below the channel’s support line might be temporary, and the pound will come stronger next week to test resistance at 1.4000 again.

However, much depends on the Bank of England’s (BoE) meeting scheduled for next Thursday, August 5.

The BoE is expected to maintain its massive stimulus running at full speed even though two members of the bank’s Monetary Policy Committee (MPC) believe that the nearly 900 billion pound bond-buying program has to end early due to inflation concerns.

In the long term, many investors anticipate that the BoE will raise interest rates before the Fed, even though the US economy has already reached its pre-pandemic levels, unlike Britain’s. Under this scenario, the pound will have an edge and might consolidate well above 1.4000.

While Britain’s economy hasn’t fully recovered, it is rebounding quickly, especially thanks to the reopening of the economy and the central bank’s easy policy. However, the UK’s inflation surged well above the BoE’s 2% target, exceeding 3%.

Two BoE policymakers – Deputy Governor Dave Ramsden and Michael Saunders – said that they would favor a tighter policy, prompting investors to expect the central bank to reduce bond-buying earlier than planned. However, there is strong opposition as well. MPC member Gertjan Vlieghe said:

“I think it will remain appropriate to keep the current monetary stimulus in place for several quarters at least, and probably longer.”

To conclude, the pound might continue its rally despite the recent correction, but it all depends on the BoE’s tone. Also, during the first week of August, investors will keep an eye on the UK’s manufacturing purchasing managers index (PMI) for July, along with services PMI, composite PMI, and construction PMI.

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