Home Forex trading GBP/USD Hit by UK Recession Dangers and Fed Hawkishness

GBP/USD Hit by UK Recession Dangers and Fed Hawkishness

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BRITISH POUND OUTLOOK:

  • GBP/USD falls to its lowest level since March 2020 on fears that the UK economy may be headed for an imminent recession
  • The British pound maintains a bearish outlook against the U.S. dollar over the medium term
  • This article looks at cable’s key technical levels to keep an eye on in the coming days and weeks

Most Read: Goldman Sachs UK Outlook Hurts Sterling on Summer Bank Holiday

The British pound has weakened relentlessly against the U.S. dollar in 2022, down more than 13% since the start of the year. Early Monday in thin trading due to the bank holiday in the United Kindom, GBP/USD plunged below 1.1700 and briefly hit 1.1649, its lowest level since March 2020, when the COVID-19 pandemic crippled the global economy and wreaked havoc in financial markets.

Cable’s negative bias is not likely to end soon. On the sterling side of the equation, rising recession risks in the UK will continue to undermine the European currency in the FX space. For context, many Wall Street banks see the UK economy contracting steadily from the fourth quarter of this year through the first half of 2023 on the back of sky-high inflation, which is forecast to worsen in the coming months in response to the region’s ongoing energy crisis following the war in Ukraine.

With GDP expected to take a hit in the medium term, the Bank of England may be reluctant to tighten monetary policy forcefully, as a steep hiking cycle could exacerbate the incoming downturn. Against this backdrop, sterling will lack the catalysts needed for a sustained and lasting recovery against the greenback.

Focusing on the U.S. dollar, its outlook remains constructive, especially after the Federal Reserve pledged to stay the course despite the rapid slowdown in activity. At last week’s Jackson Hole Symposium, Chairman Powell said in no uncertain terms that restoring price stability will likely require maintaining a restrictive stance for some time and cautioned against prematurely loosing policy, pouring cold water on the idea that policymakers will start slashing borrowing costs next year to counter economic weakness.

The Fed’s hawkish posture should keep U.S. yields skewed to the upside, offering support to the U.S. dollar. Moreover, the USD could receive another boost if the tightening roadmap causes sentiment to deteriorate further and trigger violent volatility; after all, the American currency often trades as a risk-off proxy.

In the current environment, it is difficult to be bullish on GBP/USD. While temporary bounces in the exchange rate are possible and should not be entirely ruled out, the path of least resistance appears to be lower, at least in the medium term. For this reason, it may only be a matter of time before the pair retests its 2020 lows near the psychological 1.1400 level.

GBP/USD TECHNICAL ANALYSIS

After the recent slump, GBP/USD is sitting slightly above 1.1650, a major support defined by the post-Brexit low. If the bulls fail to defend this floor and prices break below it decisively, selling pressure could accelerate, setting the stage for a slide towards 1.1412, the pandemic trough. On the flip side, if buyers resurface and spark a rebound, initial resistance comes at 1.1760, followed by 1.1960. On further strength, the focus shifts to the 1.2300 handle. Although markets can sometimes surprise traders with unexpected moves, both technical and fundamental analysis point to further downside for the British pound.

GBP/USD TECHNICAL CHART

UK technical chart

GBP/USD Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX





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