GBP/USD falls below 2021 lows in 1.3160 area, now probing 1.3100 amid fears of European stagflation
|- GBP/USD broke below key long-term support (the 2021 lows) on Monday and is now probing the 1.3100 level.
- As global commodity prices continue to spike amid the ongoing Russo-Ukraine conflict, stagflation fears are particularly acute in Europe.
- Recent events have also clouded the outlook for BoE tightening more than for the Fed.
GBP/USD broke below a key level of support in the form of the 2021 lows in the 1.3160 area on Monday as the US dollar enjoyed broader strength versus all of its G10 counterparts. The bearish breakout that also saw cable drop below a key December 2020 low around 1.3140 saw the pair accelerate to the downside and it is now probing the 1.3100 handle. At current levels, GBP/USD trades just shy of 1.0% lower on the day, taking its losses since over the past two sessions to roughly 1.8% and its losses on the month to 2.3%.
Considering it’s only March 7, that’s quite a big move on the month already and could just be the tip of the iceberg. In less than two weeks, Russia’s invasion of Ukraine and the subsequent Western sanction response has triggered a melt-up in global commodity prices and thus fears of stagflation that are particularly acute in Europe. That probably goes some way towards explaining why the major European G10 currencies have been the underperformers so far this month.
As market participants scramble to reassess their outlooks for the global economy and central bank policy, risks seem tilted towards further GBP/USD losses. Given the US economy is less vulnerable to the negative growth impact of the Russo-Ukraine conflict but still struggling with multi-decade high inflation, the Fed looks to be on autopilot towards hiking interest rates back to neutral in the coming quarters/years. While the UK economy also already faces elevated inflation (which will only get worse given recent events in Ukraine), it was already facing (even prior to recent events) a cost-of-living crisis from Q2 onwards.
There can be no such certitude that the BoE will press ahead with lifting rates back towards neutral. The prospect of a UK environment of prolonger stagflation and low BoE interest rates (and subsequently massively low real rates) is a toxic one for GBP. From a technical perspective, the next two major areas of support are around the 1.2850 and 1.2675 areas. The coming weeks may well see both tested.
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