Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2350.
- Add a stop-loss at 1.2550.
- Timeline: 1-2 days.
Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.2600.
- Add a stop-loss at 1.2350.
The GBP/USD pair crashed below an important support level as investors embraced a risk-off sentiment amid the debt ceiling crisis. The pair retreated to a low of 1.2446, the lowest point since May 2 of this year.
Risk-off sentiment
A risk-off sentiment has spread in the market as concerns about slow economic growth and the debt ceiling issue. Democrats and Republicans are yet to agree on a resolution on how to keep the government funded in June.
Analysts believe that the two sides will reach an agreement in the coming weeks because of the risks involved if the US defaults. It will lead to a higher unemployment rate and more volatility in the financial market.
The pair also slumped as the crisis in the regional bank sector continued. The KBW regional and large bank indices dropped by 6.2% and 3.5%, respectively last week. Some of the most vulnerable banks like PacWest and Western Alliance saw their shares crash hard. There is a possibility that the situation will worsen in the coming months.
The GBP/USD also declined despite the divergence between the Federal Reserve and the Bank of England. In a statement last week, the Bank of England (BoE) decided to hike rates by 0.25%. With the country’s inflation jumping to double-digits, there is a possibility that the bank will continue hiking.
The Fed, on the other hand, is expected to pause its rate hikes since inflation is falling. The headline consumer inflation dropped from 5.0% in March to 4.9% in April. Therefore, the Bank of England will continue hiking as the Fed pauses its rate hikes.
The key economic numbers to watch this week will be the UK jobs numbers and US building permits and housing starts.
GBP/USD technical analysis
The GBP/USD pair had the worst weekly crash in three months. It dropped and moved below the lower side of the ascending channel shown in blue. It has also moved below the 25-period moving average while the Relative Strength Index (RSI) has moved below the oversold level. Similarly, the Stochastic Oscillator indicator has moved to the oversold point.
Therefore, the pair will likely continue falling, with the next level to watch being at 1.2350. The stop-loss of this trade will be at 1.2600.
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