Will the pound maintain a growth trend?

The pound is now the strongest against the US dollar since April 2018 and it seems that there is nothing that could stop it. Technically, it has overcome all-important resistances and is fundamentally driven by rapid vaccination and the prospect of a rapid economic recovery. Nevertheless, Britain faces several challenges, including the ongoing lockdown, the spread of coronavirus mutations, or trade disagreements with the EU. Macroeconomic data will be released on Wednesday, which may suggest which direction the pound will go.

Stronger even without the US dollar

The pound has exceeded the expectations of almost all investors since the beginning of the year, as it has managed to grow despite a slowing economy and trade disputes with the EU. The growth of the pound seemed to be largely due to the weakening US dollar, similar to the euro. However, this is not entirely true, as the euro and other currencies came under temporary pressure as the US dollar corrected its losses in January, while the pound retained its high value and the correction was only on an intraday basis. At the beginning of the month, the pound reaffirms its relative strength and overcomes a number of important resistances that we thought would at least suspend its growth. It is currently being traded only in pairs with the dollar at the highest levels since April 2018 and is not far off from the maximum values of that same year. The situation is also positive for the EURGBP pair, where the pound is on the strongest levels since May last year.

Chart: EURGBP Daily Chart (Source: Purple Trading cTrader)

Negative interest rate risk

Although last week's data showed that the British economy narrowly avoided a recession, investors should be careful. This is due to very weak activity in the services sector, which is key to the British economy. Ongoing lockdowns may also force the British central bank to ease its monetary policy even more. At its last meeting, the British central bank reiterated that it did not plan to cut interest rates to the negative, but at the same time asked commercial banks to be prepared for a possible step. However, the pound seemed to like the introductory words about the postponement of negative interest rates as we could witness its further growth. However, the risk is still there and further steps may be indicated by tomorrow's release of inflation and retail sales data.

The fastest vaccination in Europe

At the same time, the rise of the British pound is reflected in the very impressive pace of vaccination in the country, which is not only the fastest in Europe but also gives investors a clear signal where the fastest economic recovery could be expected. Looking at the vaccination rate of the developed economies, only Israel with 71 doses per 100 inhabitants is better off with vaccination. Britain is currently on 24 doses per 100 inhabitants. For comparison, in the Czech Republic, we are at number 4.2. Wednesday's data will not suggest whether a faster vaccination rate will actually translate into faster economic recovery. Worse data could disprove this expectation and put the pound under pressure in the short term. Most likely, however, even worse data will not be a disaster for the pound and attention will be focused on later data from the beginning of the second quarter of this year.

Chart: 4H GBPUSD chart (Source: Purple Trading cTrader)

Technically, the pound exceeded several-month highs at 1.37487, which has not yet been tested. It is currently trying to bridge the 2018 sales gap at 1.3917, from which a correction may still come, as this is the closest level of resistance. However, the market managed to break through yesterday and today it is testing it from the other side, and it does not look like a false breakout yet, but the situation may change quickly by the end of the day. A possible correction could come up to 1.3863, where there is a local maximum and consolidation before continuing the trend.

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