Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.1500.
- Add a stop-loss at 1.1700.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.1650 and a take-profit at 1.1750.
- Add a stop-loss at 1.1550.
The GBP/USD continued its bearish trend as the US dollar strength continued and as concerns about the upcoming steep recession in the UK. The pair dropped to a low of 1.1618, which was the lowest level in over two years.
UK painful recession
The GBP/USD has dropped in the past four straight days as investors continue worrying about the UK economy. Recent data show that the economy is heading towards a steep recession as inflation continues rising.
On Wednesday, the Office of National Statistics (ONS) ruled that the £400 energy discount from the government will not lower inflation during winter. As a result, analysts expect that the country’s inflation will rise to 13% in October.
In a report, analysts at Deutsche Bank said that the decision will prevent a 2.7% reduction in the retail price index measure of inflation. In total, the decision will cost the government £14 billion in an additional cost for index-linked government debt. Another report by Goldman Sachs estimated that inflation will peak at 22%.
Earlier this week, Ofcom said that the retail energy cap will increase from the current £1,971 to £3,549 in October. This price increase will lead to lower spending since wages are not rising as much.
The decision came at a time when government spending has increased, pushing public debt to historical highs. Data published in August showed that public sector net borrowing rose by £4.9 billion in July after it borrowed by £20.9 billion in June. The situation will likely worsen if the next government decides to implement more tax cuts.
The next key catalyst for the GBP/USD price will be the Nationwide house price index data from the UK. Economists expect the data to show that home prices pulled back slightly in August. It will also react to the latest UK and US manufacturing PMI data.
GBP/USD forecast
The GBP/USD pair has been in a strong downward trend in the past few weeks. It managed to move below the important support level at 1.1760, which was the lower side of the inverted cup and handle pattern.
It has moved below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) moved below 50. The pair also formed a break and retest pattern. Therefore, the pair will likely continue falling as sellers target the next key support level at 1.1500.
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