21.05.202618:43 Forex Analysis & Reviews: GBP/USD – Smart Money Analysis: The Pound Weakens Due to Geopolitical Uncertainty

The GBP/USD pair declined for four consecutive trading days. As a result of this sell-off, bears reached imbalance zone 18, which represents a bullish pattern. Therefore, bearish pressure may end near this pattern. This week, we saw a confident reaction from imbalance 18, including its full fill, a sharp rebound in prices, the formation of a bullish engulfing pattern, and a return to bearish imbalance 19. Thus, bulls have taken the first step toward forming a new bullish impulse, but a second step is now required — invalidating imbalance 19. What are the chances of this happening? Given the renewed decline in the euro on Tuesday and Thursday, they are not particularly high at the moment. Considering the aggressive statements from Donald Trump and Tehran, the probability becomes even lower. The UK inflation report released yesterday only narrowly avoided triggering another wave of bearish pressure. Inflation in the UK slowed to 2.8%, making monetary policy easing in the coming months highly unlikely. As a result, the balance may shift in favor of either bulls or bears, but the outcome will largely depend on geopolitics. If the market receives at least one credible signal regarding successful negotiations in the Middle East before the end of the week, bears may retreat quickly, allowing bulls to preserve the trend. Otherwise, the market reaction may emerge precisely from bearish imbalance 19.

The situation surrounding the resolution of the Middle East conflict appears to have reached a deadlock, while traders remain uncertain about the market's next direction. Today the market may favor bulls, while tomorrow it may shift toward bears. This is precisely the type of environment observed in recent weeks. At the moment, confidence in peace efforts in the Middle East and the reopening of the Strait of Hormuz has fallen to very low levels.

In my view, the trend remains bullish despite the pair's sharp declines this year. At present, the ceasefire situation in the Middle East remains fragile, but it still holds. Naturally, markets cannot indefinitely rely on unconfirmed information when making trading decisions. The Strait of Hormuz remains effectively under dual blockade, while Tehran and Washington continue unsuccessfully attempting to break the deadlock without making significant concessions during negotiations. The situation alternates between improvement and deterioration. Markets remained highly optimistic for nearly a full month, but last week they faced the reality of the situation.

The technical picture currently looks as follows. Bullish imbalance 18 generated a price reaction, so if not for bearish imbalance 19, I would already be preparing for a strong bullish advance. However, bearish imbalance 19 was formed within an overall bullish trend, so I do not yet consider it suitable for opening short positions. The downward move may continue only in the event of new, truly significant, and negative geopolitical developments in the Middle East conflict.

Thursday's economic background, to put it mildly, did not support the British pound. PMI indices showed mixed dynamics, as the services sector declined to 47.9 points, while the manufacturing sector remained at 53.7 points. Nevertheless, the pound should be considered relatively resilient given that it did not fall further following this week's unemployment and inflation reports.

In the United States, the broader informational backdrop remains such that, from a long-term perspective, there are few reasons to expect anything other than further dollar weakness. Even the conflict involving Iran and the United States changes little in this regard. Geopolitical tensions temporarily restored the dollar's safe-haven appeal for approximately two months, but the overall long-term outlook for the US dollar remains challenging. The US labor market continues to weaken, the economy is moving closer to recession, and unlike the ECB and the Bank of England, the Federal Reserve does not appear prepared to tighten monetary policy in 2026. Additionally, four major protest movements against Donald Trump have already taken place across the United States, while Jerome Powell's eventual departure could further worsen the dollar's outlook if the FOMC under Kevin Warsh adopts a more dovish stance. From an economic perspective, I see no fundamental reasons supporting dollar growth.

News Calendar for the US and UK:

United Kingdom

• Retail Sales Data (06:00 UTC)

United States

• University of Michigan Consumer Sentiment Index (14:00 UTC)

The May 22 economic calendar contains only two relatively minor events. Therefore, the impact of economic data on market sentiment on Friday may be limited or absent altogether.

GBP/USD Forecast and Trading Advice:

For the British pound, the long-term outlook remains bullish. The Three Drives pattern warned traders about the beginning of the upward move, and since then, three bullish patterns and three bullish signals have formed. Last week, geopolitics complicated the previously optimistic outlook for bulls, but they still have an opportunity to maintain control within imbalance 18. To achieve this, bulls must invalidate imbalance 19 and receive supportive geopolitical developments. My target for the pound remains the 2026 high at 1.3867. I will only begin considering a bearish trend if imbalance 18 is invalidated. In that case, bearish patterns would come into effect. Until that happens, I continue to expect further growth.