Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.2446.
- Add a stop-loss at 1.2335.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 1.2360 and a take-profit at 1.2300.
- Add a stop-loss at 1.2425.
The British pound’s sell-off continued as the price of crude oil and the US dollar index rally gained steam. The GBP/USD pair slipped to 1.2377, the lowest level since June 5th. It has dropped by almost 6% from the year-to-date high.
UK and US divergence
The GBP/USD exchange rate has been in a freefall in the past few months as the UK and US recovery diverges. The most recent numbers showed that the British economy was recovering at a slower pace than the UK.
Its unemployment rate stands at 4.3% while the UK has a rate of 3.8%. Most of the country’s sectors like industrial production, retail sales, energy, and real estate are all growing at a slower pace. As a result, home prices are dropping at the fastest pace in years.
The US economy is doing much better. Home prices have held quite well, helped by the rising demand and low supplies. Consumer confidence has risen, leading to higher retail sales in the country.
The Federal Reserve and the Bank of England (BoE) will be the key events to watch this week. With UAW workers in strike, analysts expect that the Federal Reserve will maintain its interest rates intact between 5.25% and 5.50%.
In the UK, the Office of National Statistics (ONS) will first publish the latest consumer and producer inflation data on Wednesday. Economists polled by Reuters expect the data to reveal that the country's inflation remained above the 2% target in August as energy prices rose.
The Bank of England will likely leave rates unchanged when it concludes its September meeting on Thursday. While inflation remains high, the bank’s governor believes that more rate hikes will likely lead to more economic weakness.
GBP/USD technical analysis
The GBP/USD pair has been in a strong bearish trend in the past few weeks. It has remained below the 25-period and 50-period exponential moving averages (EMA). The pair also slipped below the key support at 1.2446, the lowest level on September 7th.
Most importantly, the pair has formed a falling wedge pattern, which is nearing its confluence level. Therefore, while the downward trend could continue in the coming weeks, there is a likelihood that it will have a bullish breakout in the next few days.
If this happens, the key resistance level to watch will be at 1.2445 while the support level will be at 1.2300.
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