Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2400.
- Add a stop loss at 1.2595.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.2525 and a take-profit at 1.2625.
- Add a stop-loss at 1.2450.
The GBP/USD exchange rate continued plunging after a hawkish statement by Jerome Powell and strong US economic numbers. The pair slipped to 1.2535 on Monday, its lowest point since December last year.
US and UK divergence
There are signs that the UK and US economies have diverged in the past few months. While the UK narrowly avoided a recession, the US is one of the fastest-growing economies in the developed world. Its manufacturing and services sectors are doing well while the labor market is still tight.
This view was confirmed by the OECD, which noted that the US expanded by 2.5% while the UK grew by 0.3% in 2024. The organization, which is a club of rich countries, estimates that the US will grow by 2.1% this year while the UK will expand by 0.7%.
The strength of the US economy was confirmed on Friday when the government published strong jobs numbers. According to the Labor Department, the economy created over 350k jobs in January while wage growth accelerated.
As a result, in a TV interview, Jerome Powell reiterated that the Fed was not expecting to start cutting rates in the next meeting in March since inflation remains stubbornly high. The OECD, on the other hand, expects that the US inflation will continue falling and settle at 2.2% this year. It also expects that the Fed will start cutting rates later this year.
The UK, on the other hand, is still struggling, with inflation being double the Bank of England (BoE) target of 2.0%. The manufacturing sector has also continued to contract as companies complain about the rising cost of doing business and Brexit implications.
There will be no major economic data from the US and the UK on Tuesday. Therefore, traders will focus on the upcoming statement by Loretta Mester, the head of the head of Cleveland Fed. In her recent statement, she warned that March will be too soon to start cutting rates.
GBP/USD forecast
The GBP/USD exchange rate found a strong resistance point at 1.2793 since December. It formed a triple top pattern at this point and recently made a major bearish breakout after last week’s Fed and BoE decisions. The pair has plunged below the key support level at 1.2596, its lowest swing on January 17th. It is now approaching the key support at 1.2500, a psychological level and also the lowest swing on December 13th.
Therefore, the outlook for the pair is extremely bearish as the US dollar index rebounds. This trend could see it drop to the next key support at 1.2400.
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