GBP/USD Technical Analysis: Short-term Bearish Bias

After the sharp collapse of the GBP/USD currency pair towards the 1.1350 support level, its lowest since 1985, the British pound closed last week’s exciting trading, stable around the 1.1423 level. The currency finds a recovery at the end of this week’s trading when the Bank of England interest rate hike and the “mini-budget” are raised.

The monetary and fiscal dual trend comes after the pound fell against the dollar to its lowest level since 1985 on Friday, while the euro did not see its lowest levels since February 2021. The pound’s losses accelerated in 2022 after the release of disappointing British retail sales data that made economists warn that the British economy is already in recession. Retail sales fell -1.6% in the month ending in August, defying expectations of less than 0.5%.

Commenting on the performance, Joe Manimbo, chief analyst at Convera, formerly Western Union Business Solutions, said: “The pound fell to a 37-year low against the dollar after the worrying news about the British consumer pushed the economy a big step into recession.” “The dismal presentation suggests that the Bank of England on September 22 will raise interest rates less sharply than the Fed, and will likely choose to raise 50 basis points to 2.25%,” he adds.

Such a decision by the British central bank would lead to more pain for the pound, given market expectations of a 75 basis point hike. Meanwhile, a 75 basis point hike from the Fed is expected on Thursday. The Bank of England has consistently underperformed against market expectations in the current rally cycle, allowing the Pound to lose value.

The global central banks that previously held negative rates (the Swiss Central Bank and the European Central Bank) are more hawkish than the Bank of England, and all readers need to know how the BoE has positioned itself. This week’s Bank of England meeting is increasingly important and if they send the wrong message, sterling will be in big trouble, says Pierce. “We expect the Bank of England to rise 50 basis points on Thursday,” said Robert Wood, UK economist at Bank of America. He adds: “Government utilities price caps reduce peak inflation by 450 basis points, in our view. The anticipated lower and first peak of inflation reduces the risk that the Bank of England will pick up the pace again by raising 75 basis points in September, in our view.”

Shihab Galen, forex analyst at Credit Suisse, says the UK bank has to deal with 100 basis points if it is to restore credibility and challenge the negative narrative about sterling. He says such a move would increase the return paid on British assets, thus attracting the needed capital for the foreign investor needed to fund the country’s chronic current account deficit.

Upcoming Major Event for Pound

With the deficit in mind, the next major event for the Pound this week is Chancellor Kwasi Quarting’s mini budget, due on Friday. The chancellor is expected to provide a watered-down set of updated forecasts from the Office of Budget Responsibility that were prepared in response to the already advertised energy bill guarantee. The actual maximum energy bills will be financed by government borrowing and the final cost will ultimately depend on how gas prices behave in the coming months. However, expectations are that the UK government will need to issue more debt than previously expected to fund the additional spending, which means it will likely have to pay higher debt service costs.

GBP/USD technical analysis:

In the near term and according to the performance of the hourly chart, it appears that the GBP/USD currency pair is trading within a descending channel formation. This indicates a significant short-term bearish bias in market sentiment. Therefore, the bears will look to extend the current range of declines towards the 1.1353 support or lower to the 1.1284 support. On the other hand, the bulls will target potential bounces around 1.1461 or higher at 1.1542.

In the long term and according to the performance on the daily chart, it appears that the GBP/USD currency pair is trading within the formation of a sharp descending channel.This indicates a strong long-term bearish momentum in the market sentiment.Therefore, the bulls will target long-term profits at around the 1.1685 resistance or higher at the 1.1946 resistance.On the other hand, the bears will look to pounce on profits at around the 1.1142 support or lower at the 1.0862 support.

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