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British Pound Forecast: GBP/USD Heading Swiftly Toward March 2020 Lows

British Pound Forecast: GBP/USD Heading Swiftly Toward March 2020 Lows

Warren Venketas, Analyst

POUND STERLING ANALYSIS & TALKING POINTS

  • Planned fiscal stimulus weighs on GBP.
  • 10-year Gilt yields through 3%.
  • Fed speakers in focus later today.
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GBP/USD FUNDAMENTAL BACKDROP

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Cable has been unable to shirk off a surging USD, while the appointment of Prime Minister Liz Truss has provided no respite. If anything, the appointment looks to deliver more downside risk for the currency as proposed fiscal support measures of £130bn (energy) and £40bn (business) respectively adds to an already poor UK current account situation (see graphic below).

GBP/USD vs UK CURRENT ACCOUNT BALANCE vs UK 10Y GILT YIELD

GBP/USD vs UK CURRENT ACCOUNT BALANCE vs UK 10Y GILT YIELD

Source: Refinitiv

Fundamentally, high inflation, high energy prices, increasing deficit, recessionary fears and post-Brexit uncertainty have resulted in investors shying away from the UK as shown by UK 10Y Gilt yields pushing above 3%. While Truss’s efforts may relieve the weight on consumers short-term, the long term effects could be severe for low income and indebted citizens.

GBP/USD ECONOMIC CALENDAR

ECONOMIC CALENDAR

Source: DailyFX Economic Calendar

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Later today, we look forward to a series of Federal Reserve speakers (see economic calendar above). I will be looking for any dovish shift in their statements but after yesterdays stellar services report, I highly doubt any such intention which should keep the greenback supported.

From a UK perspective, markets await further guidance from Liz Truss around the details of her fiscal strategies.

TECHNICAL ANALYSIS

GBP/USD DAILY CHART

GBP/USD DAILY CHART

Chart prepared by Warren Venketas, IG

GBP/USD price action has somewhat consolidated over the last few daily candles, coinciding with an oversold Relative Strength Index (RSI) but considering the fundamental headwinds facing the UK economy, the March 2020 swing low at 1.1410 may be around the corner.

Key resistance levels:

  • 20-day EMA (purple)
  • 1.1600

Key support levels:

  • 1.1410

BEARISH IG CLIENT SENTIMENT

IG Client Sentiment Data (IGCS) shows retail traders are currently LONG on GBP/USD, with 80% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term downside bias.

GBP/USD Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 4% 1% 3%
Weekly -18% 52% 3%
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Contact and follow Warren on Twitter: @WVenketas

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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