The pound paired with the dollar continues to creep up, overcoming local price barriers. At the moment, the Briton is testing the resistance level of 1.3480, which corresponds to the upper line of the Bollinger Bands indicator on the D1 timeframe. The next intermediate “stop” is located at 1.3500 (the lower limit of the Kumo cloud on the same timeframe).
On the side of the pound are Boris Johnson, who decided not to tighten quarantine restrictions in the country, and the Bank of England, which raised the interest rate at its last meeting this year. Fundamental factors of a political nature, as well as echoes of Brexit, are against the pound. The political opposition and Johnson’s inner-party opponents are preparing a “hot January” for him. Parliamentary battles may end with the resignation of the prime minister – voluntarily or forcibly, through the procedure of declaring a vote of no confidence. And any political instability, as you know, does not play on the side of the national currency – in this case, the pound. The BoE may also delay further steps to tighten the parameters of monetary policy. If Omicron does “close” the country at the beginning of next year, the British central bank will certainly take a wait-and-see attitude, assessing the consequences of another lockdown.
It is noteworthy that Johnson is now being criticized, mainly because he did not dare to take extreme measures on the eve of Christmas and New Year. According to a number of British journalists, the prime minister has driven himself into a political trap. On the one hand, Johnson played on the side of the opponents of the new restrictions, de facto downplaying the danger of Omicron. Thus, he won certain electoral points and indirectly supported the pound, which soared throughout the market. On the other hand, Omicron may subsequently “finish off” Johnson’s political career, which many now criticize for “criminal negligence.” If further events develop according to this scenario, the pound will be under significant pressure.
It should be recalled here that at the end of last year, Johnson came under a barrage of criticism due to an untimely reaction to the COVID threat and due to a series of inconsistent actions. Even the prime minister’s former advisers subsequently accused the government of incompetence. According to them, the members of the Cabinet of the Minister did not treat the pandemic with due seriousness. Then the stolid indifference was replaced by panic.
To date, dissatisfaction with Johnson is growing again: his political rating has collapsed in almost all regions of the country. According to some journalists, the prime minister is again stepping on the same rake. So, in early December 2020, the British government lifted the lockdown, despite the high incidence rate. Before Christmas, the Cabinet of Ministers had to urgently introduce it again in the face of the rapid spread of a new, more contagious variant of the Delta virus.
According to political observers, the situation is now repeating exactly the same, only Omicron is now instead of Delta, and Johnson, instead of removing the lockdown, did not introduce it in the country, although the current epidemiological situation is getting worse every day.
So, according to the latest data, over the past day, a coronavirus infection was detected in 129,000 Brits. This is the highest daily increase for the entire period of the pandemic. At the same time, the real number of those infected is actually even greater: Yesterday’s statistics did not include new cases of infection in Scotland and Northern Ireland (they refused to count during the Christmas holidays). Negative trends are clearly visible. The figures show that over the past week the number of cases of infection has increased by 30% compared to the previous seven-day period.
Against this background, Johnson refused to impose strict quarantine in the UK. Residents of the kingdom can gather for parties both at home and in pubs, restaurants without limiting the number of participants. The head of the Ministry of Health, Sajid Javid, publicly stated that he did not support the prime minister’s position, “but had to obey his decision.”
The decision not to introduce new restrictions was made after the prime minister held a meeting with the chief sanitary officer of England and a senior scientific adviser to the government. They discussed the latest research regarding the dangers of the Omicron strain. Johnson assumes that those infected with the Omicron strain are 50-70% less likely to be hospitalized than those infected with the Delta variant. His opponents, in turn, say that Omicron is at the same time 4 times more contagious than its predecessor, and, therefore, captures the “risk group” more extensively. This is also evidenced by statistics: despite the relative “softness” of the new strain, the number of people hospitalized with COVID-19 in England has increased by almost 40% over the past week.
Thus, if after the New Year London does introduce a lockdown against the background of ongoing COVID-anti-records, Johnson’s position will be further shaken. According to the results of the latest poll by the YouGov sociological institute, the rating of the head of the British government has dropped to record lows for the entire time he has been in office. 66% of respondents stated their negative attitude towards Johnson. According to Bloomberg, the prime minister is now saved from a party vote of no confidence only by the absence of an obvious candidate to replace him. However, in the new political season, which will begin after the end of the New Year holidays, clouds will gather over Johnson again: almost all experts interviewed by the agency do not doubt this.
In the context of the GBP/USD pair, this means that in the medium term – at least until the end of this week – the price will gradually rise, against the background of a “thin” market, the actual absence of a lockdown in Britain and the BoE’s hawkish position. The “ceiling” of the upward corrective movement, in my opinion, is the 1.3550 mark – this is the average line of the Bollinger Bands indicator, which coincides with the Kijun-sen line on the D1 timeframe. However, if we talk about the prospects for January, then longs look risky here, given the prevailing fundamental background. Too many problematic issues have been put on pause: the Northern Irish problem, the issue of fishing in the English Channel, the Scottish issue, the coronavirus wave, the fate of Johnson’s premiership, etc. By and large, these are “time mines” that will remind you of themselves already in the first working weeks of 2022. Therefore, when approaching the above target, it is most expedient to take profit and a wait-and-see position.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.