GBP/USD Technical Analysis: Rebound Gains Under Threat

Despite the attempts of an upward correction in the price of the GBP/USD currency pair, analysts warn that the pound is set for a summer of weakness against the euro, the dollar, and other major currencies. The British economy suffers from deflation and the Bank of England abandons its cycle of raising interest rates.

Accordingly, most analysts expect the Pound to remain under pressure against the US Dollar and the GBP/USD which could lead to a test of the 1.20 level, or even a drop below it. They also say that the pound’s rally against the euro may be over by now, which means that the pound-to-euro exchange rate’s peak at 1.2188 in March was a milestone.

This leads to a crude turn of events for those hoping to sell sterling; The British currency is already recording a loss of 1.86% against the euro for 2022, while losses against the US dollar are 7.40%.

Sentiment towards the sterling took another big hit this week after data out of the UK showed economic activity deteriorated significantly in May. The S&P Global Composite PMI for May came out at 51.8, lower than expected at 56.5 and 58.2 in the previous month. Such a sharp month-to-month drop is almost unprecedented: the monthly loss of momentum in May was the fourth largest on record and surpassed anything seen before the pandemic.

Bilal Hafeez of Macro Hive says in a recent market commentary for CME Group. Fundamentals still point to sterling weakness: “High inflation, very cautious BoE and global risk aversion could see further sterling weakness”,

Data from the Office for National Statistics showed that CPI measures of inflation reached 11.1% in April and 9% on the CPI scale. Accordingly, Hafeez says: “These are among the highest rates of inflation in the developed world.” It also means that UK CPI inflation has now exceeded the US average (8.3%) for the first time since mid-2020, he says.

From a forex market perspective, the policy response between the Bank of England and the Fed is significant.

The Federal Reserve is “increasingly hawkish and ready to push the US economy into recession, while the Bank of England is moving on fears that the UK economy is slowing too much. As a result, the Fed is expected to raise rates by 100 basis points in its next two meetings in June and July, while the Bank of England is only expected to raise cumulatively by 70 basis points at its June and August meetings.”

Macro Hive expects the BoE to likely pause and reassess the situation with its updated August monetary policy report forecast. Even the European Central Bank is sending more “hawkish” signals after President Christine Lagarde warned this week that interest rates will rise in July and again in August.

“As the market reacts to Christine Lagarde’s ECB policy roadmap, it is a lot easier to see sterling as the weakest currency in Europe,” says Kit Juckes, Head of FX Research at Société Générale. The pound is now “the weakest currency in Europe,” Gokes says, adding that the market is lagging behind buying the euro and selling sterling as an “easy default” to the recent ECB policy change.

According to the latest data, UK consumer confidence is now at an all-time low according to GfK metrics, despite the tightening labor market. Moreover, other economists argue that the British economy should avoid such a disastrous outcome if employment remains strong. According to the forecast for GBP/USD, Hafeez says: “These factors together could lead to the GBP/USD pair resuming its weak trend and touching its 2019 low at 1.20 in the coming months.”

According to the technical analysis of the pair: On the daily chart below, the price of the GBP/USD currency pair is still at the beginning of breaking the descending channel. It still needs to breach the 1.3000 psychological resistance to confirm the strength of the break. The pair is still under pressure from the pessimism of the Bank of England and weak results The recent British economic data, on the other hand, the US Federal Reserve, which is more tightening, and the US data with good results support that.

The closest support levels for the Sterling Dollar today are 1.2480 and 1.2390, and the last level threatens the current bullish correction attempts. The pair will react strongly today with the announcement of the growth rate of the US economy, the number of weekly jobless claims, and the complete absence of Britain’s data.