GBP/USD Technical Analysis: British Policy may Stop Collapse – 06 September 2022

The GBP/USD exchange rate suffered heavy losses last week. It now faces the risk of falling further after a Russian state energy supplier announced an indefinite suspension of gas deliveries to Germany, which could weigh on the euro and other European currencies in the coming days.

Overall, the British pound took a direct hit for the longest stretch of its daily losses on Monday when it fell against the dollar for the seventh consecutive session after Russia’s Gazprom announced late on Friday that the Nord Stream gas pipeline would remain closed indefinitely.

There is a bearish gap for the GBP/USD pair at the beginning of this week, as it fell towards the 1.1444 support level, the lowest in years, before settling around the 1.1516 level at the time of writing the analysis.

Commenting on the performance, Joseph Caporso, analyst at the Commonwealth Bank of Australia said, “GBP/USD could remain heavy this week due to fears of aggressively rising inflation and an impending recession. Accordingly, GBP/USD may fall below its lowest level at 1.1412 this week. and “no important domestic economic data scheduled.” The price of the pound against the dollar closed at 1.1412, its lowest common since March 2020 and April 1985, on Monday, while it was not clear whether Secretary of State Liz Truss’s comments at the end of the week would be enough to prevent it from falling further in light of the crystallization of energy supply risks.

The foreign secretary is expected to be announced as the Conservative Party candidate for prime minister on Monday, so she will likely make her emphasis on the independence of the Bank of England’s (BoE) monetary policy in an interview with the BBC. Some analysts and economists have cited a planned review of the BoE’s mandate and doubts about its commitment to the independence of monetary policy as potential contributors to the pound sterling’s losses against the dollar and other currencies in recent weeks. The details of the campaign’s commitments to “take immediate action” on the “cost of living crisis” are important which could have implications for the Bank of England’s interest rate policy.

Declines are sharp

While this week’s decline is likely to have been exacerbated by month-end rebalancing and corporate inflows, British assets are clearly not seen as attractive at current exchange rates, says Paul Robson, FX analyst at Natwest Markets. This means that the GBP risk is strongly skewed in favor of further declines, and declines are likely to be sharp. According to analysts, while the cyclical bottom of 1.1412 may see a pause, there is really very little reason for the decline to stall at this level unless the growth outlook improves.

While European energy issues and British government policy are likely to be the dominant drivers of the pound against the dollar in the coming days, there is also a batch of important US economic data to be released and a slew of comments from Fed policy makers. Most of all, Federal Reserve Chairman Jerome Powell will participate in a moderate discussion at the Cato Institute’s annual monetary conference on Thursday, though three others will also attend public participations before that including Vice President Lyle Brainard.

Fed officials are still not committed to the size of the rate hike at the FOMC September 20-21 meeting. Fed officials aside, the most important event in the US calendar is likely to be Tuesday’s release by the Institute for Supply Management (ISM) of its services purchasing managers’ index for August, which is expected to decline from 56.7 to 55.0. With last week’s manufacturing PMI, the market may be looking to see if it confirms the message of previous S&P Global PMI surveys, which indicated that both sectors slid deeper into recession last month.

Sterling dollar forecast today:

The general trend of the GBP/USD pair is still bearish.Despite the technical indicators reaching oversold levels, which may matter to think about buying the pair, the sterling lacks the least momentum factors to rebound higher.The US dollar is still the strongest in expectations of raising US interest rates.We expect the market to return to normal after yesterday’s US holiday.The sterling dollar pair may interact with the plans of the new British administration in the face of challenges that weaken the expectations of economic recovery in Britain.The closest support levels are currently 1.1465, 1.1390 and 1.1300, respectively.

On the other hand, according to the performance on the daily chart, there will be no reversal of the current trend without moving towards the 1.2000 level. Today, the PMI for British construction will be announced, and from the United States, the ISM index for American services will be announced.

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