BRITISH POUND OUTLOOK:
- GBP/USD falls to its lowest degree since March 2020 on fears that the UK financial system could also be headed for an imminent recession
- The British pound maintains a bearish outlook in opposition to the U.S. greenback over the medium time period
- This text appears to be like at cable’s key technical ranges to keep watch over within the coming days and weeks
The British pound has weakened relentlessly in opposition to the U.S. greenback in 2022, down greater than 13% for the reason that begin of the 12 months. Early Monday in skinny buying and selling as a result of financial institution vacation within the United Kindom, GBP/USD plunged beneath 1.1700 and briefly hit 1.1649, its lowest degree since March 2020, when the COVID-19 pandemic crippled the worldwide financial system and wreaked havoc in monetary markets.
Cable’s destructive bias just isn’t more likely to finish quickly. On the sterling facet of the equation, rising recession dangers within the UK will proceed to undermine the European foreign money within the FX house. For context, many Wall Avenue banks see the UK financial system contracting steadily from the fourth quarter of this 12 months by way of the primary half of 2023 on the again of sky-high inflation, which is forecast to worsen within the coming months in response to the area’s ongoing power disaster following the conflict in Ukraine.
With GDP anticipated to take successful within the medium time period, the Financial institution of England could also be reluctant to tighten financial coverage forcefully, as a steep mountain climbing cycle might exacerbate the incoming downturn. Towards this backdrop, sterling will lack the catalysts wanted for a sustained and lasting restoration in opposition to the dollar.
Specializing in the U.S. greenback, its outlook stays constructive, particularly after the Federal Reserve pledged to remain the course regardless of the fast slowdown in exercise. Eventually week’s Jackson Gap Symposium, Chairman Powell stated in no unsure phrases that restoring value stability will probably require sustaining a restrictive stance for a while and cautioned in opposition to prematurely loosing coverage, pouring chilly water on the concept that policymakers will begin slashing borrowing prices subsequent 12 months to counter financial weak point.
The Fed’s hawkish posture ought to preserve U.S. yields skewed to the upside, providing help to the U.S. greenback. Furthermore, the USD might obtain one other enhance if the tightening roadmap causes sentiment to deteriorate additional and set off violent volatility; in any case, the American foreign money typically trades as a risk-off proxy.
Within the present setting, it’s tough to be bullish on GBP/USD. Whereas short-term bounces within the change price are potential and shouldn’t be fully dominated out, the trail of least resistance seems to be decrease, a minimum of within the medium time period. For that reason, it might solely be a matter of time earlier than the pair retests its 2020 lows close to the psychological 1.1400 degree.
GBP/USD TECHNICAL ANALYSIS
After the latest droop, GBP/USD is sitting barely above 1.1650, a serious help outlined by the post-Brexit low. If the bulls fail to defend this flooring and costs break beneath it decisively, promoting stress might speed up, setting the stage for a slide in the direction of 1.1412, the pandemic trough. On the flip facet, if patrons resurface and spark a rebound, preliminary resistance comes at 1.1760, adopted by 1.1960. On additional energy, the main focus shifts to the 1.2300 deal with. Though markets can typically shock merchants with sudden strikes, each technical and elementary evaluation level to additional draw back for the British pound.
GBP/USD TECHNICAL CHART
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—Written by Diego Colman, Market Strategist for DailyFX