GBP/USD: What’s with all that?

Multiple pound notes £5, £20 and £50 Pound Sterling
Joe Perry
By :  ,  US Market Analyst

Just two months ago, GBP/USD was trading at its lowest level EVER, reaching a low print of 1.03565.  Today, the pair is trading near 1.1950!  A lot has happened in the last 2 months to bring the pair from the brink of collapse to today’s levels.  Many attributed the selloff to Liz Truss, or at least to her “mini-budget”, which would have left a gaping hole in the budget deficit.  Although this may have been the straw that broke the camel's back, GBP/USD had been moving lower for months before the late September selloff.  GBP/USD had formed a Year-to-Date high on February 22nd at 1.4250!  The pair had been moving lower as it became apparent that the US Federal Reserve had to begin raising rates quickly. The board finally decided that rising inflation wasn’t transitory. On April 22nd, the pair crashed through 1.3000 and by mid-June the pair was trading 1.2000.  Once at 1.2000, GBP/USD continued lower in an orderly channel until Wednesday, September 21st.  The pair closed at 1.1235, below the bottom trendline of the channel.  Why had it been moving lower since 1.4200?

20221128 gbpusd daily pre selloff

Source: Tradingview, Stone X
 

While inflation was flying high in the US, the Fed stepped up its pace of race hikes to 50bps in April.  By mid-June, the Fed was hiking 75bps at a clip.  Meanwhile, Bank of England was only hiking rates by 25bps at a time, as it was particularly concerned about driving the British economy into a recession.  It wasn’t until its last rate hike on November 3rd that the BOE finally hiked by 75bps to bring the cost of borrowing to 3%.  GBP/USD was moving lower due to interest rate differentials.  When the “mini-budget” proposal was presented, liquidity dried up in bonds, causing GBP/USD to collapse.  However, despite previously not raising rates aggressively enough, the BOE did save the UK bond market, which helped the Pound recover.  Now, with inflation at 11.1% YoY in the UK, and “only” 7.7% YoY in the US, its anticipated that the UK will have to hike rates higher and longer than in the US. However, there is also Prime Minister Sunak’s autumn budget which the markets still need to deal with:  Increased taxes and lower spending.  This may help with the BOE’s prediction of a recession coming down the pike.

20221128 gbpusd daily bounce

Source: Tradingview, Stone X

 

On daily timeframe, GBP/USD was on a mission to get to 1.2000.  The price rose in an ascending wedge formation and broke out above the top of the pattern.  Expectations are that price should break lower from an ascending wedge.  Will price continue lower from here?  Pullbacks are normal in an uptrend and a pullback to the 38.2% Fibonacci retracement level (at 1.1467) from the lows of September 26th to the highs of November 24th is not out of the question.  However, the pair must pass through support before that level.  The first support level is at the top trendline of the wedge near 1.1900.  If price breaks below there, the next level of support is at the top, downward sloping trendline from the long-term channel near 1.1650, then the bottom trendline of the wedge near 1.1550.  However, if price continues to move higher, resistance (previous highs) ahead of 1.3000 are 1.2293, 1.2660, and 1.2843.

So, if GBP/USD can move lower due to the Fed being more aggressive than the BOE, is the reverse true as well? Or is GBP/USD just having a bear market bounce?  Watch the key support levels to see if price holds.  If it does, then GBP/USD may be on its way towards 1.3000!

 

Related tags: Trade Ideas Forex GBP/USD BOE

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