Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2150.
- Add a stop-loss at 1.2280.
- Timeline: 1-2 days.
Bullish view
- Set the buy-stop at 1.2250 and a take-profit at 1.2300.
- Add a stop-loss at 1.2150.
The GBP/USD exchange rate remained under pressure on Monday morning as traders assessed risks to the US economy. The pair was trading at 1.2225, which was much lower than last week’s high of 1.2430.
US debt rating downgrade
The biggest catalyst for the GBP/USD pair was the decision by Moody’s to downgrade its outlook of America’s debt. While the agency expects the American economy to do well in the coming years, it is concerned about the rising debt and political polarization.
Moody’s believes that interest payments relative to revenue and GDP will jump to 26% and 4.5%, respectively by 2033. They stood at 9.7% and 1.9% in 2022, signaling that the US debt situation is set to worsen.
The country’s total debt burden has surged hard in the past few months. It has risen to over $33.7 trillion a few weeks after it crossed the $33 trillion mark. The Treasury Department has hinted that it will have to borrow over trillion dollars in the coming months.
Worse, there are signs that the US is struggling to find buyers of its long-term debt. On Thursday, the Treasury Department struggled to raise capital as investors sought higher interest rates because of the risks facing the American government.
Primary dealers picked just 24.7% of the total issuance in the latest $24 billion sale. The bid-to-cover ratio has dropped to the lowest level in over two years.
The other big risk facing the US is the end of government funding. While the Republican speaker has issued his plan to avert a shutdown, there are signs that it will not have enough votes in the House of Representatives and Senate.
Therefore, there is the risk that the US will go through a government shutdown soon. There will be no data from the US and UK on Monday as traders wait for the upcoming US inflation numbers.
GBP/USD technical analysis
The GBP/USD pair suffered a harsh reversal last week after it peaked at a high of 1.2430. It has now slipped below the key support levels at 1.2336 (October 11th high) and 1.2288 (October 24 high). The 25-period and 50-period moving averages are about to make a bearish crossover.
It has also formed a small bearish pennant pattern. Therefore, the pair will likely continue falling as sellers target the psychological level at 1.21500.
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