The pound has been besieging the 1.3480 resistance level (the upper boundary of the Kumo cloud on the W1 timeframe) against the dollar for the third consecutive week. At the beginning of March, the GBP/USD pair sharply declined (to the level of 1.3250), reacting to the onset of military actions in the Middle East. But then the pound reversed 180 degrees and within a week climbed back to the boundaries of the 35 figure. While the siege of the target at 1.3480 is accompanied by quite deep price pullbacks, the pair returns to this level each time. The Bank of England has played a significant (and possibly key) role in this, adopting a notably hawkish position following its March meeting. It was so hawkish that the market began to price in the likelihood of an interest rate hike this year. Such conclusions (in my opinion, hasty) have allowed GBP/USD buyers to "hold the line" even during periods of overall strengthening of the greenback.
Following the March meeting, the Bank of England kept all monetary policy parameters unchanged. The central bank implemented the basic and most anticipated scenario. However, the details of the meeting turned out to favor the British currency.
First, the Bank of England demonstrated a consolidation of opinions in favor of a cautious position. All nine members of the Committee voted to maintain monetary policy as it was. It is important to recall that at the previous February meeting, this issue hung by a thread: four MPC officials voted for a rate cut. This time, even Swati Dhingra, the most consistent advocate for low rates, cast her vote for a wait-and-see position. Not to mention other representatives of the "dovish" wing (Dave Ramsden, Sarah Breeden, Alan Taylor). Just a month and a half ago, the Committee was nearly split in half, but in March, all the "doves" changed their minds and lined up with the "hawks." Such monolithicity (which is rare at the Bank of England) supported the pound.
Second, the central bank tightened its rhetoric, focusing on inflationary risks. While the February meeting expected inflation to remain within the target level by the end of spring, the central bank now forecasts CPI to rise to 3.5% as early as this month. Moreover, the Bank acknowledged that inflation might stay above 3.0% over the next two quarters. In this context, the central bank pointed out the risks of "secondary effects," in which rising energy prices lead to higher business costs, and businesses, in turn, pass these costs onto consumers, who demand higher wages from their employers (which are already hovering around the 4% mark).
The strong wording of the accompanying statement and comments from Andrew Bailey supported the pound, as the market began to price in one or two interest rate hikes by the end of the current year. Although the Bank of England did not formally discuss the option of tightening monetary policy, traders came to this conclusion independently, so to speak, "on their own initiative." Hawks believe that the central bank will be forced to raise rates if inflation remains above 3.5%. Amid such assumptions, GBP/USD buyers keep returning to the 1.3480 resistance level (the upper boundary of the Kumo cloud on the W1 timeframe).
However, in my opinion, market participants have rushed to make hawkish conclusions. It should not be forgotten that in the current situation, the energy crisis not only drives inflation but also negatively impacts economic growth. For example, at the same March meeting, the Bank of England revised its UK GDP growth forecast down to 1.0%. Although the focus has shifted toward inflationary risks (the central bank currently considers inflationary risks more dangerous than the risk of recession), the question remains whether the central bank will raise rates if signs of stagflation emerge in the economy. If this question is raised by members of the dovish wing of the MPC (Dhingra, Ramsden, Breeden, Taylor), the pound will come under significant pressure.
The first "warning bell" has already sounded—just today, after disappointing PMI indices were released in the UK. In particular, the services index fell to 51.2 this month (forecast at 52.8), the lowest level since September of last year. The manufacturing index formally showed a minimal decline (from 51.7 to 51.4), but this result is misleading as the index was propped up by extended delivery times. In current realities, this is not a sign of activity but rather a marker of logistical disruptions. In fact, the manufacturing index is on the verge of stagnation. The composite PMI index dropped to 51.0, marking a four-month low. This result indicates that the growth momentum observed at the beginning of the year has nearly exhausted itself.
Thus, in my opinion, the potential for further growth of GBP/USD remains limited. This is evidenced, in particular, by buyers' inability to break above the aforementioned resistance level at 1.3480. In this price area, it makes sense to consider short positions with an initial target at 1.3390 (the middle line of the Bollinger Bands on the daily chart) and a main target at 1.3250 (the lower line of the Bollinger Bands on the same timeframe).
