GBP/USD Technical Analysis: Remains in Downtrend Channel – 07 September 2022

Forex analysts at a major European investment bank cut their forecasts for GBP/USD, citing a worsening economic trajectory in the UK. Despite the appointment of a new British Prime Minister with a stimulus agenda for the British economy, the market reaction and the GBP/USD pair is limited, as it only jumped to the level of 1.1609, then fell back to the support level 1.1510 again.

Continued downtrend

New analysis from Intesa Sanpaolo, the Italian lender and financial services provider, has found that Britain’s declining growth prospects and an uncomfortable inflation picture mean that the British pound will end up lower than previously expected. In this regard, Asmara Jamaliah, an economist at Intesa Sanpaolo, says in a note issued on September 5: “We also revised down our forecast for the pound against the dollar.”

The forecast came on the same day that the GBP/USD exchange rate reached a new low of 1.1423, ensuring the continuation of the long-term downtrend. This was also the day it was announced that Liz Truss would become the UK’s next Prime Minister, as markets hope that Truss’ appointment will end a period of uncertainty over the economy. Jamala adds that this uncertainty has played a role in the recent weak performance of the pound. But it is believed that Truss will not materially alter the economic outlook, which is what ultimately drives down Intesa Sanpaolo’s forecast. Specifically, Jamala notes that the Bank of England is expected to enter the UK into recession at the end of this year.

If Truss takes new measures to bolster the economy, which is widely expected, most economists say this will make the recession shallower, not prevent it entirely. For Intesa Sanpaolo, this should ensure the continued depreciation of the pound. The bank lowers its forecast for the GBP/USD exchange rate to 1.12, 1.10, 1.18 and 1.24 on a 1-month, 3-month, 6-month and 12-month horizon. This is down from expectations of 1.18, 1.23, 1.27 and 1.30 previously.

Sterling recovered slightly after slipping to its lowest level since March 2020. The recovery was buoyed by a report that incoming Prime Minister Liz Truss has crafted plans to avert an energy crisis that threatens to exacerbate the UK’s longest economic downturn since the financial crisis. The chart represents a rare piece of good news for the downside sterling as high inflation and recession fears cast a shadow over the UK’s economic outlook. The currency has fallen for three consecutive months, but analysts polled by Bloomberg expect it to rise to $1.19 by March 2023.

However, a technical indicator is indicating that the pound’s gains may be fleeting. Despite the advance on Tuesday, the currency remains in a downtrend channel against the dollar with additional trendline resistance emerging around $1.20. Sterling has fallen nearly 15% this year against the dollar, underperforming most of its G10 peers.

GBP/USD forecast today:

General trend of the GBP/USD pair is still bearish.Despite the arrival of technical indicators on the daily and weekly charts towards oversold levels, the sterling did not find enough momentum to exploit that and rebound.The US dollar is still being stimulated by the results of the economic data and the Fed officials’ assurances of the continuation of the path US interest rate hike.Breaking the 1.1500 support will support the move towards stronger support levels, the closest of which are 1.1435 and 1.1300, respectively.I still prefer to buy sterling dollars from every bearish level with no risk.

According to the performance on the daily chart, it will be important to break the resistance 1.20 to get out of the sharp bearish channel now.

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