GBP/USD finds some support near mid-1.1600s, not out of the woods yet amid bullish USD
|- GBP/USD drifts lower for the second successive day and drops to its lowest level since March 2020.
- Rising bets for more aggressive Fed rate hikes, the risk-off mood continues to underpin the USD.
- A bleak outlook for the UK economy weighs on the GBP and further contributes to the selling bias.
The GBP/USD pair extends Friday's sharp retracement slide from the 1.1900 round figure and continues losing ground for the second straight day. The downward trajectory drags spot prices to the lowest level since March 2020, around mid-1.1600s during the first half of trading on Monday and is sponsored by strong follow-through US dollar buying.
During his speech at the Jackson Hole Symposium, Fed Chair Jerome Powell squashed hopes of a dovish pivot and signalled that interest rates would be kept higher for longer to bring down inflation. This, in turn, lifts bets for a supersized 75 bps rate hike at the September FOMC meeting and triggers a fresh leg up in the US Treasury bond yields. Apart from this, the prevalent risk-off mood pushes the safe-haven USD to a 20-year peak and turns out to be a key factor exerting pressure on the GBP/USD pair.
The British pound, on the other hand, continues to be weighed down by worries about a deeper economic downturn amid the recent absurd surge in energy prices and the persistent rise in inflation. In fact, the Bank of England had predicted earlier this month that the UK economy will enter a prolonged recession from the fourth quarter of 2022. This, along with some technical selling below the previous YTD swing low, around the 1.1720-1.1715 region, further contributed to the GBP/USD pair's downward trajectory.
Technicals are a little mixed and warrant caution: on the bearish side there is a 'death cross' on the weekly chart from the 50-week SMA crossing below the 200-week SMA, and a possible bearish flag pattern may be unfolding its leg down on the daily chart. These insignia, however, are offset by the steadily lessening vigour of each downside pass. RSI(14) on both the weekly and daily charts is converging bullishly with price at each trough of the summer downtrend (its cleareast on the weeklies), and this suggests selling pressure may be waning and the pair could be at risk of rebounding. A narrative of peak inflation might be the catalyst for such a rebound as it would weaken the dollar, but its difficult to foretell what could cause a reversal, if it ever happens. At the moment, despite the convergence, the trend remains down and as the old adage says "the trend is your friend".
Indeed, slightly oversold conditions on intraday charts seem to holding back day traders from placing more aggresive bearish bets and helping limit further losses, at least for the time being. Nevertheless, the fundamental backdrop supports prospects for an extension of the depreciating move. This, in turn, suggests that any attempted recovery move might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly amid absent relevant market-moving economic releases.
Technical levels to watch
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.