The GBP/USD fell to long term lows yesterday, but the trading occurred as a bank holiday was being celebrated in Britain.

The GBP/USD is trading near the 1.17180 mark as of this writing.  For traders who turned their head’s away yesterday and didn’t pay attention, the GBP/USD currency pair fell to a low of nearly 1.16480, thus today’s higher trading value may be considered a potential bright spot. But before traders are tempted to believe the worst is over for the British Pound, they might want to consider the following.

The notion that Great Britain was celebrating its ‘end of summer’ holiday yesterday and banks were officially closed meant that British institutions weren’t actively trading.  The notion that an ‘unprotected’ British Pound was left to the sentiment of international trading houses and sold off with a rather large amount of gusto is troubling. It could be a sign that behavioral sentiment globally views the GBP/USD as still being too highly valued.

GBP/USD Bullish Traders may believe the Forex pair is oversold but should be careful

The last time the GBP/USD traded at yesterday’s lows was during the height of coronavirus fear when the Forex pair went to within sight of the 1.14225 ratio momentarily in March of 2020. Yes, this time is different than the coronavirus experience, but the question if it is a better economic circumstance should be asked. Economic outlooks and central bank interest rate policies remain troubling for Great Britain and its global counterparts. The fact the U.S Fed seems intent on maintaining a hawkish interest rate policy is playing havoc with the GBP/USD too.

• The 1.17000 level should be watched closely, if it falters again short term, this could be a bearish signal.
• Later this week jobs data from the U.S is certain to create more volatility for the GBP/USD, and financial institutions may be positioning now for the statistics that will come on Friday.

Current Support Levels should be monitored for Additional Signals from the GBP/USD

If the 1.17000 were to prove vulnerable again and trading is sustained below this ratio, it would be a troubling signal for the GBP/USD. Yesterday’s move towards extreme lows may not be repeated short term, but it is a reminder that sentiment remains fragile. If current support begins to falter, traders could not be blamed for wagering on marks below the 1.17000 that target 1.16900 for quick hitting results if they are willing to bet on downside price action. Conditions will likely remain choppy in the GBP/USD and its bearish trajectory shows few signs of relenting in the near term.

GBP/USD Short Term Outlook:

Current Resistance: 1.17239

Current Support: 1.17010

High Target: 1.17580

Low Target: 1.16510

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The recent selling operations witnessed by the GBP/USD currency pair stopped at the support level of 1.2100, bouncing back from the resistance level of 1.2293 and settled around the level of 1.2145 in the beginning of trading today, Thursday. Ahead of the most important event for the sterling pairs, which is the monetary policy decisions of the Bank of England, followed by the next most important event, which is the US jobs numbers on Friday. This will have an impact on the market expectations of the future of raising US interest rates. Barclays forex analysts say sterling is likely to head lower after Thursday’s BoE update, but Goldman Sachs is more positive regarding the outlook for the British currency, especially against the euro.

The Bank of England’s Monetary Policy Committee is expected to announce another rate hike before releasing its latest inflation and economic growth forecasts. Prior to that, the pound strengthened against both the euro and the US dollar during the latter part of July and early August and the major test of the currency comes with the size and shape of the announced rise.

It is noted that the biggest downside risk to the pound comes in the form of disappointing the British central bank against market expectations by raising another 25 basis points. This is because the market is now almost completely “priced” up 50 basis points and based on various comments from MPC members and the June statement that it is now ready to act “aggressively” in order to control inflationary impulses. In this regard, Marek Rachko, an analyst at Barclays, agrees. “A 50 basis point delivery could lead to an unexpected rally in sterling, while a 25 basis point move should see a bigger selloff,” Rachko says.

Barclays expects the British central bank to raise 50 basis points, in line with the consensus. However, “any rally should be short-lived or reverse quickly as we expect the Bank’s updated forecasts to show stagflationary stagflation impulses.” This will be a repeat of the May policy update, in which the bank raised interest rates but released a set of forecasts showing inflation will slip below the 2.0% target over the medium term while growth will drop to negative by the end of the year.

All in all, the Sterling fell following the May update, and trended lower against most of the major currencies over the following weeks. However, the GBP/EUR exchange rate has received better support since the Bank of England’s June update as it said it was prepared to act more “aggressively” on inflation. Since then, it has risen again above 1.19 and the GBP/USD exchange rate has returned to 1.22 this week.

Barclays expects just one additional 25 basis points in September, with the bank leaving the final interest rate at 2%.

This would prove to be a major failure in capturing current market rates and pose a significant downside risk to the pound’s exchange rate levels. Currency analysts at Goldman Sachs are more positive regarding the prospects for the Pound Sterling, especially against the Euro. They expect the MPC to raise 50 basis points in a break from the “most gradual and balanced approach” taken so far this year that favored delivery in 25 basis point increases.

However, the FX team acknowledges that a 50 basis point hike would represent an important change in the bank’s approach, “and the Fed’s return toward a more balanced strategy makes the BoE somewhat less anomalous.”

GBP/USD forecast today:

I have often recommended selling the pound sterling against the dollar (GBP/USD) from every bullish level. This is especially with the recent performance, as the markets have already priced in the Bank of England’s move today to raise interest rates. In return, the US dollar is taking advanced levels in front of everyone before the announcement of US jobs numbers, along with the return of investor appetite. Technically, the pound sterling dollar breaking the support level of 1.2100 will force the bears to move further downwards, and accordingly the most prominent downward move will be the support level 1.1965.

On the upside, and according to the performance on the daily chart, the GBP/USD pair needs to test the resistance levels 1.2330 and 1.2400, respectively, to stabilize the bullish outlook.

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For two consecutive weeks, the EUR/JPY currency pair was subjected to selling due to concern about the future recession of the Eurozone economy. This came at a time when the European Central Bank accepted for the first time to raise interest rates in many years. Selling losses pushed the EUR/JPY towards the 136.86 support level, and it settled around the 138.50 level in the beginning of this week’s trading.

In the recent period, there has been a torrent of statements by European Central policy officials commenting on the future of raising interest rates and their amount, and the reaction to doing so, especially as the eurozone faces an inevitable recession due to the continuation of the Russian-Ukrainian war. European Central Bank Governing Council member Yanis Stournaras said a new tool to keep debt market turmoil at bay, as there may be no need to use higher interest rates if they are strong enough to convince investors not to test them.

In an interview with Bloomberg TV on Saturday in Aix-en-Provence, France, Stournaras said there was a “very good discussion” going on about the tool, expressing confidence in a “consensual and effective solution” and hoping it would surprise markets “on the positive side”. “I think there is a lot of truth in the idea that if we convince the markets that this is going to be a powerful tool, we may not need it,” the Bank of Greece governor added. And “we will have it on the shelf. This is a good scenario.” In the face of record inflation, European Central Bank officials preparing for a series of interest rate increases are racing to ensure there is no negative reaction in bond markets for the most vulnerable members of the eurozone. And since a jump in Italian government revenue in June, they have accelerated work on a so-called anti-fragmentation tool, which policy makers have so far called the Transport Protection Mechanism.

Sturnaras’ comments recall the European Central Bank’s Explicit Monetary Transactions program that followed former President Mario Draghi’s famous pledge to do “whatever it takes” to hold the eurozone together amid the sovereign debt crisis. And in this case, his words were persuasive enough to never use OMT.

And while officials aren’t yet sure that the new tool will be ready for their July 21 decision, according to people familiar with the matter, Stournaras was more upbeat. But he declined to go into detail about the conditions that eurozone members would need to meet to be eligible for assistance.

He emphasized that the instrument was necessary, however, in the absence of broader reforms in the European Union.

The official said the European Central Bank’s plan to raise the deposit rate by a quarter of a point this month is likely to happen. With a bigger date for the next meeting, in September, Stournaras said, “We’ll see what the data says on the inflation front and also on the activity front.” He sees price growth starting to slow down towards the end of the year and approaching the medium-term target of 2% in 2024. It is currently more than four times that level. “I won’t be able to tell you where it will peak because it depends on external factors that can’t be measured by models,” Sturnaras added, and “maybe it depends on geopolitical considerations.”

The price increase will coincide with a slowdown in the 19-nation eurozone economy – an economy that could turn into a recession. Expectations of a downturn are growing as the possibility of a Russian power cut this winter becomes more real than ever. ING warned that a recession is coming regardless.

EUR/JPY Forecast

On the daily chart, the EUR/JPY is still within a bearish channel range, and despite the recent halt, the bears’ control is still the strongest and their control factors continue to lead a bleak future for the eurozone economy due to Russia’s pressure to cut gas from the bloc countries. The closest support levels for the current trend are 137.70, 136.80 and 135.00, respectively. On the upside the bulls won’t get back in control without moving above the 140.00 psychological resistance and so far I still prefer selling EURJPY from every bullish level.