Bearish view
- Sell the GBP/USD and set a take-profit at 1.1400.
- Add a stop-loss at 1.1600.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.1550 and a take-profit at 1.1650.
- Add a stop-loss at 1.1450.
The GBP/USD price dropped to the lowest level since 1985 against the US dollar as investors focused on weak economic data from the UK. It then bounced back slightly after Lizz Truss managed to defeat Rishi Sunak to become the next UK prime minister. It rose to 1.1518, which was higher than Monday’s low of 1.1445.
Lizz Truss to replace Boris Johnson
The GBP/USD price pulled back slightly on Monday after Lizz Truss defeated Rishi Sunak to become the next UK premier. The mild reaction of the pair was mostly because her victory was already priced in by market participants.
In addition, Truss is not expected to bring radical changes to the economy. Her key challenge will be on how to fight the soaring inflation that analysts expect will soar to over 20% in 2023.
According to the Financial Times, Truss is considering capping energy prices at in one of the most costly government interventions. Last month, Ofcom said that the average household bill will rise from almost 2,000 pounds to 3,500 pounds in October.
The energy crisis worsened after Russia announced that it will not pump gas to Europe until the bloc ends its sanctions against the country. It is unclear whether the UK and other European countries will end these sanctions as the war continues.
The GBP/USD price also reacted to the relatively weak economic data from the UK. According to S&P Global, the UK services PMI dropped from 52.5 in July to 50.9 in August. This decline was worse than the expected 52.5. In the same period, the composite PMI dropped from 52.1 to 49.6. Therefore, the Bank of England will be under pressure to hike interest rates as the UK stares at a recession.
GBP/USD forecast
The GBP/USD pair continued its bearish trend in the past few days. On Monday, the pair crashed to a multi-decade low of 1.1448. It remains below all moving averages and is between the lower and middle lines of the Bollinger Bands. The pair is alos below the important resistance level at 1.1753, which was the lowest level on July 14.
Therefore, the bearish trend will likely continue as the US dollar strength accelerate. The next key support will be at the psychologically-important level at 1.1400. The stop-loss of this view will be a move to 1.1560.
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