GBP/USD Signal: Sterling Drop to Parity Can’t be Ruled Out – 26 September 2022
The GBP/USD price came under intense pressure as investors worried about the UK economy. It also crashed to a more than three-decade low as signs of a divergence between the Fed and Bank of England (BoE) emerged. It crashed to a low of 1.0848, meaning it has crashed by 20% this year alone.
Lizz Truss tax cuts
The GBP/USD pair has been under intense pressure in the past few months as the US dollar strength continued. This sell-off continued on Thursday after a divergence between the Fed and Bank of England.
On Wednesday, the Fed decided to hike interest rates by 75 basis points. The dot plot pointed that the bank will continue hiking interest rates in the coming months. Precisely, the plot pointed to another 75 basis point increase in November and followed by 0.50% in December.
On Thusday, the BoE decided to hike interest rates by 0.50% which was the seventh time it has hiked since December last year. This increase was seen as being dovish since other central banks like the Swiss National Bank (SNB) delivered bigger increases.
The GBP/USD price then accelerated its sell-off after the new tax cuts by Lizz Truss’ administration. Economists have pegged these tax cuts at about 45 billion pounds, which is the biggest cut in decades. The tax cut, which will be funded using debt, will be used to lure companies to the UK.
In statements, economists criticized the tax cuts. For example, Larry Summers, the former Treasury Secretary warned that the UK was starting to behave like an emerging market. Another report by the Institute for Fiscal Studies warned that public borrowing will top 190 billion pounds this year.
In an interview with the Financial Times, Chancellor Kwarteng said that the tax cuts will help push UK growth rate to 2.5%.
The four-hour chart shows that the GBP/USD price has been in a strong bearish trend in the past few weeks. It has crashed below all moving averages while the Relative Strength Index (RSI) and the MACD have moved to the lowest level in months.
Therefore, it seems like bears have the momentum as sellers target the next key level at parity, which is about 7% below the current level. Sterling will remain under pressure as people move to the safety of the US dollar.