GBP/USD Outlook: Reaction to BoE intervention, if any, is likely to be short-lived

The GBP/USD pair builds on last week's breakdown momentum and collapses to an all-time low during the Asian session on Monday. The market reaction to the UK mini-budget is overwhelmingly negative amid the lack of confidence in the government’s ability to manage the ballooning debt. The UK Finance Minister Kwasi Kwarteng announced reductions in the top rate of income tax, national insurance, and stamp duty worth £45bn. This comes after UK Prime Minister Liz Truss unveiled plans to subsidize energy bills and threatens to stretch Britain's finances to their limits. Apart from this, relentless US dollar buying turns out to be another factor behind the free fall in the British pound.

The Fed last week delivered another supersized rate hike, as was widely anticipated, and signalled large increases at its upcoming meetings. A more hawkish stance adopted by the US central bank remains supportive of elevated US Treasury bond yields. In fact, the yield on the rate-sensitive 2-year US government bond hits a 15-year high and the benchmark 10-year Treasury note stands tall near its highest in 11 years. Furthermore, the prevalent risk-off environment continues to underpin the safe-haven greenback and contributes to the GBP/USD pair's slump. Spot prices, however, manage to recover over 250 pips from lows amid speculation of emergency response from the Bank of England.

Market participants expect that the UK central bank will have to step in to stabilise sterling, though any meaningful recovery still seems elusive as the most radical fiscal plan since 1972 could undermine the BoE’s goal to tame inflation amid looming recession risks. This, in turn, suggests that the path of least resistance for the GBP/USD pair is to the downside. Traders on Monday will take cues from speeches by influential FOMC members - Boston Fed President Susan Collins, Atlanta Fed President Raphael Bostic and Dallas Fed President Lorie Logan. Apart from this, the US bond yields, along with the broader risk sentiment, will influence the USD and provide some impetus.

Technical Outlook

From a technical perspective, Friday’s convincing breakdown through a multi-month-old descending channel was seen as a fresh trigger for bearish traders. That said, extremely oversold oscillators on short-term charts warrant some caution. This makes it prudent to wait for some near-term consolidation or a modest bounce before positioning for any further downside.

In the meantime, any meaningful recovery is more likely to confront stiff resistance and remain capped near the daily high, around the 1.0845 region. The latter should act as a pivotal point, which if cleared decisively will suggest that the GBP/USD pair has formed a near-term bottom.

On the flip side, the 1.0500 psychological mark now seems to protect the immediate downside ahead of the 1.0400 round figure and the record low, around the 1.0330 region. Some follow-through selling will set the stage for a slide towards challenging the parity mark in the near term.