There is no change in my technical view for the performance of the GBP/USD pair. 

• At the beginning of this week’s trading, and despite the holiday in Britain, the price of the GBP/USD currency pair fell to a stronger support level, towards 1.1648, its lowest since the height of the market crash in 2020. It settled around the 1.1700 level at the beginning of trading today, Tuesday.
• The US dollar is still the strongest against everyone with expectations of a strong raise of the US interest rates in the coming months to contain US inflation, which has reached its highest level in 40 years.
• The sterling faces strong expectations of a British economic recession and the uncertainty of the political future in the country to choose a new prime minister.

Federal Reserve Chairman Jerome Powell delivered a stark warning on Friday about the Fed’s determination to fight inflation by raising US interest rates further: it will likely cause pain to Americans in the form of a weak economy and job losses. The message arrived with a heavy blow to Wall Street markets, sending the Dow Jones Industrial Average down more than 1,000 points on the day.

“These are the unfortunate costs of lowering inflation,” said Powell in a high-profile speech at the Federal Reserve’s annual economic symposium in Jackson Hole.

Investors had been hoping for a signal from Powell that the Fed may adjust US interest rate hikes soon later this year if inflation shows more signs of abating. But the Fed chief indicated that time may not be soon, and stocks have fallen in response.

Runaway price hikes have left most Americans nervous about the economy, even as the unemployment rate has fallen to a half-century low of 3.5%. It also caused political risks for US President Joe Biden and congressional Democrats in the fall elections, as Republicans decried Biden’s $1.9 trillion financial support package, approved last year, as driving up inflation.

Some on Wall Street expect the US economy to fall into recession later this year or early next, after which they expect the Federal Reserve to reverse itself and cut interest rates. However, a few Federal Reserve officials have opposed this idea. Powell’s comments suggest that the Fed aims to raise the benchmark interest rate – to about 3.75% to 4% by next year – but not so high that the economy falters, hoping growth slows long enough to conquer high inflation.

GBP/USD Forecast:

There is no change in my technical view for the performance of the GBP/USD pair.  The general trend is still bearish and stability below the 1.2000 psychological support motivates the bears to move further down, amid clear ignoring the movement of the technical indicators on the daily chart to oversold levels.

There will be no chance for the sterling to recover for a while without sudden indications from the Bank of England, which is determined to raise interest rates with no fear of economic recession. According to the performance on the daily chart, breaking the resistance 1.2080 is important for the bulls to launch and change the direction, even for a short time.

On the downside, the general trend is the strongest so far, the closest support levels for the currency pair are 1.1640, 1.1580 and 1.1500, respectively. After returning from a British holiday, money supply figures, net lending to individuals and mortgage approvals will be announced. From the United States, the US consumer confidence and the number of job openings will be announced.

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In the near term and according to the performance on the hourly chart, it seems that the GBP/USD currency pair is trading within the formation of a weak ascending channel. 

The losses of the GBP/USD pair during last week’s trades were the strongest as they fell to the lowest support level of 1.1717 since the collapse of the markets at the height of the 2020 Corona epidemic.

At the end of the week, the pair tried to recover to the resistance area of ​​1.1900, but with Jerome Powell’s confirmation of moving forward in raising the American interest rate to contain the standard inflation in the United States, he brought more strong momentum to the American dollar and therefore the sterling dollar pair moved towards the support level of 1.1735 , closing around it.

The Pound Sterling quickly gave up its gains against the dollar after Federal Reserve Chairman Jerome Powell said businesses and households would face an increasing struggle as the bank will raise US interest rates further to lower US inflation. He said this in opening remarks at the Jackson Hole Symposium hosted by the Federal Reserve Bank in Kansas City.

“July’s increase in the target range was the second increase of 75 basis points in the largest number of meetings, and I said then that another large, unusual increase might be appropriate at our next meeting,” told Powell to a gathering of central bank governors

And much of the widely anticipated speech focused on three lessons for policymakers to draw from the Fed’s experience with inflation in the 1970s and 1980s, but not before Powell said continued increases in interest rates and the passage of time would be necessary to reduce inflation.

“The restoration of price stability will take some time and requires the strong use of our tools to achieve a better balance between supply and demand. Lowering inflation will likely require a sustained period of flat growth. Furthermore, it is very likely that there will be some decline in the labor market,” continued Powell, “While high interest rates, slow growth, and soft labor market conditions will lead to lower inflation, they will also cause some pain for families and businesses. These are the unfortunate costs of reducing inflation. But the failure to restore price stability will mean much more,” he added.

The  Federal Reserve chairman pointed to clear signs of a slowdown in the US economy in recent months, but was also clear that this was unlikely to sway the Fed from its view  that US interest rates needed to rise to the restrictive level and remain at approximately four percent for an extended period to bring inflation back to the 2 percent target.

“At some point, as the monetary policy stance tightens, it will likely become appropriate to slow down the rate of increases. And it is likely that restoring price stability will require maintaining a restrictive political stance for some time,” said Powell, “The latest individual forecasts from September showed that the average federal funds rate is slightly below 4 percent until the end of 2023. Participants will update their forecasts at the September meeting,” he added.

A wide range of American data in recent weeks has indicated that the economic slowdown in the first half is likely to extend into the third quarter, which could mean there is a risk of a third contraction in a row and the continuation of the “technical recession” in the United States. The S&P Global PMI recently indicated that the recession deepened in the manufacturing and services sectors in August, continuing to contradict the equivalent Institute for Supply Management survey message.

 “While recent economic data has been mixed, in my view, our economy continues to show strong fundamental strength,” continued Powell, “The labor market is particularly strong, but it is clearly unbalanced, as the demand for workers greatly exceeds the supply of available labor. And inflation exceeds 2 percent, and the high inflation continued to spread through the economy,” he added.

Expectations for the GPB/USD:

• In the near term and according to the performance on the hourly chart, it seems that the GBP/USD currency pair is trading within the formation of a weak ascending channel. This indicates a slight upward trend in the short term in market sentiment.
• Therefore, the bulls will look to ride the recent high towards 1.1900 or higher to 1.1945. On the other hand, the bearish speculators will target potential downside profits at around 1.1812 or lower at 1.1769.
• In the long term and according to the performance on the daily chart, it seems that the GBP/USD currency pair is trading within the formation of a descending channel. This points to a significant long-term downward wound in market sentiment.
• Therefore, the bearish speculators will look to extend the current lows towards 1.1725 or lower to 1.1516. On the other hand, the bulls will target long-term profits at around 1.2028 or higher at 1.2230.

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EUR/USD

The EUR/USD has gone back and forth during the week, as we continue to hang around the parity level. At this point, it looks like we are taking a bit of a pause, but I think have to look at this through the prism of “fading short-term rallies” going forward. The market has gotten down to this level rather quickly, but now Jerome Powell has reiterated the hawkish attitude of the Federal Reserve, it’s likely that we will continue to see the US dollar reign supreme. I like fading rallies, especially near the 1.03 level if we get all the way up there.

GBP/USD

The GBP/USD initially tried to rally during the trading week but gave back gains as we continue to see a lot of negativity when it comes to the British pound, as the Bank of England has already stated that the United Kingdom is going into a recession. Because of this, the market is likely to continue fading rallies, and maybe even worse off than the Euro. If we were to break above the 1.20 level, then you might be able to make an argument for something else. Until then, this looks very bearish to me.

USD/JPY

The USD/JPY has pulled back slightly to kick off the week but then ended up rallying yet again. It looks as if we are eventually going to try to break above the recent highs, perhaps breaking through the ¥140 level. The ¥132 level underneath continues to be significant support, so I do like the idea of any pullback being bought into. If we break down below the ¥132 level, then we start to have other questions asked at that point. If the Bank of Japan continues to fight rising interest rates, this more likely than not will continue to be a “one-way trade.”

AUD/USD

The AUD/USD initially tried to rally during the week but gave back a lot of the gains at the 0.70 level. The market has seen a lot of volatility, and a lot of resistance at the 0.70 level. If we can break above the 0.70 level, then it is possible that we could go looking to the 50 Week EMA. However, it looks more likely than not that we are going to threaten the lows again after the Federal Reserve has spoken.

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The difference between success and failure in Forex / CFD trading is very likely to depend mostly upon which assets you choose to trade each week and in which direction, and not on the exact methods you might use to determine trade entries and exits.

So, when starting the week, it is a good idea to look at the big picture of what is developing in the market as a whole, and how such developments and affected by macro fundamentals, technical factors, and market sentiment. Read on to get my weekly analysis below.

Fundamental Analysis & Market Sentiment

I wrote in my previous piece on 21^st August that the best trades for the week were likely to be:

1. Short of the GBP/USD currency pair, which fell by 0.75%.
2. Long of Natural Gas, which rose by 1.04%.

This produced an average win of 0.90%.

The news is currently dominated by the Federal Reserve Chair Jerome Powell’s speech on Friday, which was received negatively by markets. Powell stated that inflation was still too high, too persistent, and too dangerous as a driver of long-term expectations to be met with anything other than tough monetary measures as part of a struggle to drive it down. Powell said this would necessarily cause some pain to the economy and he signaled there is no chance of a dovish pivot which some analysts had been hoping for after recent inflation data suggested that CPI has already peaked in the USA. Powell’s speech at the Jackson Hole symposium sent stock markets sharply lower, and hit risk sentiment hard, which sent money flowing into the US Dollar in the Forex market and out of riskier currencies such as the British Pound, the Euro, and the commodity currencies.

A 0.50% rate hike at the Fed’s next meeting is all but certain, while analysts now see a real chance of a 0.75% as an alternate possibility.

It is worth pointing out that although the US stock market had been rising in recent week, the US stock market has technically been in a bear market for some time, with the US yield curve being inverted for several weeks now. The US is also arguably in a recession, having seen two successive quarters of GDP contraction, although wages growth and the job market remain relatively buoyant. The case for recession was boosted by data released last week which showed that in Q2 2022, US GDP shrunk at an annualized rate of -0.6%.

To recap there were two other important economic data releases last week apart from the US Preliminary GDP data. The results were as follows:

1. US Core PCI Price Index data – the month-on-month increase was only 0.1%, lower than the 0.2% which had been expected, slightly boosting hopes that US inflation has already peaked.
2. US, UK, German, and French Flash PMI data – the results were mixed, but overall, more negative than had been expected, suggesting there may be a slowing in producer output in the EU, the UK, and the USA.

The Forex market saw a rise by the Australian and US Dollars last week. The rise was broad but especially strong against the New Zealand Dollar.

Rates of coronavirus infection globally dropped last week for the sixth consecutive week. The most significant growths in new confirmed coronavirus cases overall right now are happening in Japan, South Korea, Russia, and Taiwan.

The Week Ahead: 29^th August – 2^nd September 2022

The coming week in the markets is likely to show a slightly higher level of volatility than last week, with Friday’s higher level of market activity following Powell’s speech likely to continue. Releases due are, in order of likely importance:

1. US Non-Farm Payrolls, Average Hourly Earnings, and Unemployment data (plus the earlier forecast)
2. German Preliminary CPI data
3. US JOLTS Job Openings data
4. US CB Consumer Confidence
5. US ISM Manufacturing PMI data
6. Swiss CPI (inflation) data

Technical Analysis

U.S. Dollar Index

The weekly price chart below shows the U.S. Dollar Index printed a bullish candlestick which closed up, in line with the long-term trend, which is bullish. The weekly closing price is a 20-year high, and the week’s rise came after the price rejected the support level below just under 105.00 a few weeks ago. These are all bullish signs, and with the chair of the Fed giving a very hawkish speech a few days ago about the need for more rate hikes to fight US inflation, the bullish technical picture is supported by sentiment and monetary policy fundamentals.

It will probably be a good idea to look for long trades in the US Dollar over the coming week. This is a very powerful, long-term bullish trend in the most important currency in the Forex market, and it remains likely to continue if sentiment remains driven by the fear of ongoing interest rate hikes negatively impacting risky assets, with the US Dollar acting as a primary safe haven.

EUR/USD

Last week saw the EUR/USD currency pair print a bearish candlestick. This pair is technically interesting as it again printed the lowest weekly close seen in almost 20 years.

The Euro is beset by worry over the impact of ECB rate hikes which have begun and must continue. These hikes are going to put a severe strain on government bond markets in southern Europe, notably Italy.

The strength of the US Dollar and the technical breakdown we see here, plus fundamental headwinds against the Euro, see a short trend trade opportunity continue in this currency pair. However, it is probably helpful to use relatively wide trailing stop losses for this pair, as using ATR 3 has over the years produced better results than ATR 1.

GBP/USD

Last week saw the GBP/USD currency pair print a bearish candlestick. This pair is technically interesting as it printed the lowest weekly close seen since the coronavirus panic in March 2020.

The British Pound is troubled by fundamental woes, including new increased inflation figures above 10%, and a Bank of England forecast of a coming recession which will last for five quarters and see GDP shrink by 2.2%.

The strength of the US Dollar and the technical breakdown we see here, plus fundamental headwinds against the Pound, see a short trend trade opportunity continue in this currency pair. However, it is important to use relatively tight trailing stop losses for the British Pound, as using ATR 1 has over the years produced much better results than the more typical ATR 3.

NZD/USD

The New Zealand Dollar was the biggest loser of all major currencies last week, despite the RBNZ’s rate hike two weeks ago by 0.50% to 3.00%, the highest rate of any major currency. We finally see a technical breakdown below recent support here, with the price making its lowest weekly close since May 2020.

It is notable that the price closed right on the low of the week, which is a bearish sign.

There may be further bearish momentum in the NZD/USD currency pair over the coming week, with the NZD the weakest of all major currencies suggesting that this can be an interesting currency on the short side.

Natural Gas

Although we are seeing a bearish market with most commodities and risky assets shrinking against safe havens such as the US Dollar, we have seen Natural Gas gain very slightly over the past week to make new multi-year highs.

Volatility is very high and price movement can be extremely choppy.

Long natural gas can be an attractive trend trade as we are seeing a breakout in the price chart. However, anyone trading natural gas should be very, very mindful of the extremely high level of volatility we have seen here over recent months, and trade very small position sizes which respect the volatility.

What is even more concerning for anyone thinking of going long here is the fact that we see the current weekly candlestick form as an inverted bearish hammer, which hints that there may not be much upside left over the near term.

As commodities in general and energies are quite weak, I do not have strong faith in a long trade here, which is another reason to keep the position size very small if you are trading natural gas over the coming week.

Bottom Line

I see the best opportunities in the financial markets this week as likely to be short of the EUR/USD, GBP/USD, and NZD/USD currency pairs.

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Last week, I made no weekly forecast, as there were no unusually strong counter-trend price movements in the Forex market over the previous week. This week, I again make no forecast.

This week I will begin with my monthly and weekly Forex forecast of the currency pairs worth watching. The first part of my forecast is based upon my research of the past 20 years of Forex prices, which show that the following methodologies have all produced profitable results:

Let us look at the relevant data of currency price changes and interest rates to date, which we compiled using a trade-weighted index of the major global currencies:

Monthly Forecast August 2022

For the month of August, I forecasted that the EUR/USD currency pair would decline in value. The result so far is shown below:

Weekly Forecast 28^th August 2022

Last week, I made no weekly forecast, as there were no unusually strong counter-trend price movements in the Forex market over the previous week. This week, I again make no forecast.

The Forex market saw a strong decrease in directional volatility last week, with only one of all the important currency pairs or crosses moving by more than 1% in value. Directional volatility is likely to be higher over this coming week as there are a few major releases due, and the impact of Powel’s speech last Friday is likely to continue to drive markets as this week opens.

Last week was dominated by relative strength in the Australian and US Dollars, and relative weakness in the New Zealand Dollar.

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Key Support/Resistance Levels for Popular Pairs

I teach that trades should be entered and exited at or very close to key support and resistance levels. There are certain key support and resistance levels that can be watched on the more popular currency pairs this week.

Let us see how trading two of these key pairs last week off key support and resistance levels could have worked out:

EUR/USD

We had expected the level at $1.0070 might act as resistance in the EUR/USD currency pair last week, as it had acted previously as both support and resistance. Note how these “role reversal” levels can work well. The H1 price chart below shows how the price rejected this level following Jerome Powell’s hawkish speech near the start of last Friday’s New York session with a large bearish outside candlestick, marked by the down arrow signaling the timing of the bullish bounce. This is typically a great time of day to be entering trades in major Forex currency pairs. This trade has been profitable, but has achieved a maximum positive reward to risk ratio of less than 1 to 1 so far based upon the size of the entry candlestick.

GBP/USD

We had expected the level at $1.1878 might act as resistance in the GBP/USD currency pair last week, as it had acted previously as both support and resistance. Note how these “role reversal” levels can work well. The H1 price chart below shows how the price rejected this level following Jerome Powell’s hawkish speech near the start of last Friday’s New York session with a large bearish outside candlestick, marked by the down arrow signaling the timing of the bullish bounce. This is typically a great time of day to be entering trades in major Forex currency pairs. This trade has been profitable but has achieved a maximum positive reward to risk ratio of less than 1 to 1 so far based upon the size of the entry candlestick.

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• The GBP/USD has attempted to bounce during the trading session on Tuesday as the selling pressure seems to be letting up a bit.
• We are in the midst of the Jackson Hole Symposium, and central bankers will be speaking quite a bit this week.
• People will be trying to figure out what happens next, as a lot of traders have decided to call the bluff of central banks.

There’s been this narrative going around that perhaps central bankers are going to pivot, because of poor economic numbers. What traders seem to be ignoring is the fact that inflation is out of control, and even though it is slowing down a bit, in places like the United States it’s 8.5% year over year, and in the United Kingdom, it’s over 10% year over year. Because of this, central banks are going to have to tighten, despite the fact that it will almost certainly cause a recession.

Recession is Coming

The Bank of England already said that a recession is coming, essentially confirming what most people want to say out loud. The market continues to see a lot of narrative from time to time that has people thinking differently, especially in stock markets. However, in the Forex world, you can see that traders are running towards the US dollar. That should continue to be the case, especially if Jerome Powell ends up putting rumors to rest about the Federal Reserve and pivoting.

It’s been quite an interesting sideshow, watching traders try to talk themselves into a pivot that’s not coming.The US dollar is going to be like a wrecking ball for the entire world, and the United Kingdom is not going to avoid this problem. However, rallies will happen from time to time, but those are going to be opportunities to pick up “cheap US dollars.” Going forward, I suspect it’s probably a “fade the rally” type of situation. In fact, is not to we break above the 1.25 level that I would consider buying the British pound. Even then, I will have to see what the fundamental noise and news is, because although technical analysis can help, in times like this it’s more about the fundamentals than anything else, as there have been so many crosscurrents at the same time.

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The US dollar has strengthened sharply in recent days and there are likely to be further gains if global stock markets decline further from recent highs, but this week’s Jackson Hole Symposium will be the main domestic event for the US currency.

In general, the dollar rose against the euro and the pound sterling at the beginning of the week’s trading session as investors reacted to another sharp rise in natural gas prices in Europe, where they bet that the region is ready for a deep recession. The GBP/USD currency pair fell to the 1.1717 support level before settling around the 1.1810 level at the time of writing. The latest move has returned the currency pair to levels last seen during the height of the Covid panic in March 2020.

In general, the fall in the stock markets naturally helped the demand for the “safe haven” of the dollar, and it is unlikely that the gas crisis will end anytime soon.

“Risk aversion rather than expectations of the Federal Reserve Bank’s policy should remain the main support for the US dollar, which is considered a high-yielding safe haven from here,”said Valentin Marinov, head of the Foreign Currency Research Department at Credit Agricole.

Despite the dollar is rising against both the euro and the pound, Crédit Agricole told clients that the move was starting to look extended, and the two European currencies were beginning to be oversold. According to the bank’s analysts, “our measures of short-term fair value for both EUR/USD and GBP/USD, which include short-term price spreads and measures of risk aversion, do seem to indicate that the recent selling of the two USD pairs has once again moved deep An undervalued area.”

Therefore, a reversal in the opposite direction may occur before Federal Reserve Chairman Jerome Powell’s speech on Friday. But for now, the rebound must be considered temporary.

 “If a persistently tightening message from Federal Reserve Bank President Jerome Powell on August 26 raises global risk sentiment, the dollar may be the main beneficiary,” added Marinov.

The Jackson Hole Economic Symposium, hosted by the Federal Reserve Bank, will be held in Kansas City from August 25 to 27, and its topic is “Re-evaluating constraints on the economy and politics”. Powell is scheduled to speak at 15:00 GMT.

We’re also looking forward to other central bank speakers, with the full line-up likely to be detailed just before Thursday’s proceedings.

“We think this will be a good opportunity to gauge how policymakers think before their next policy decisions, and an opportunity for Fed officials in particular to set clear benchmarks for the market as September’s key data releases approach,” said  Camaxia Trifidi, forex analyst at Goldman Sachs.

Goldman Sachs isn’t looking for fireworks from the Fed chief, saying the conflicting nature of incoming US data doesn’t warrant a clear shift either way. Those looking for stocks higher are hoping that Powell will signal the need to speed up interest rate hikes after the latest consumer price index data softened and showed that US inflation may have peaked.

In fact, any such development will hold the dollar back on the net, allowing the likes of GBP/USD and EUR/USD to recover.

Technical analysis of the GBP/USD

• The recent movement of the GBP/USD currency pair pushed the technical indicators towards oversold levels according to the performance on the daily chart below.
• Despite this, forex traders are afraid of the turnout to buy when the markets’ reaction to what will happen in the Jackson Hole seminar is known.

The US dollar is still supported due to US interest rates expectations and the fear of the strongest British recession. Currently, according to the trend, the closest support levels for the currency pair are 1.1755 and 1.1680 respectively. There will be no chance for a first break of the trend without stability above the 1.2100 resistance, otherwise the trend will remain stable around its losses.

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We don’t see any major moves in sterling against the dollar until September.

The free collapse of the GBP/USD currency pair continues, and its losses reached the 1.1742 lowest support level for the currency pair in nearly 30 months. It is settling around the 1.1765 level at the time of writing the analysis. Despite the crash, it still has a chance of more downward pressure, especially if the busy US economic calendar or comments from Federal Reserve (Fed) officials allow US bond yields and the dollar to add to the gains.

The British pound was not helped by better-than-expected UK economic data and a sharp increase in market expectations for interest rates at the Bank of England (BoE) last week, often appearing to be the most vulnerable among the major currencies to a rebound in US bond yields and the US dollar. This was after a chorus of votes from the Federal Reserve’s rate-setting committee reminded the market in public comments that there was still a risk that the bank would opt for a straight 0.75% increase in US interest rates next month, stimulating US bond yields and the dollar.

With UK economic numbers ignoring and sterling losses mounting despite increases in UK bond yields that might normally have been supportive of the currency, this week’s S&P Global Purchasing Managers’ Index surveys may now be less important than risks emerging from the busy US economic calendar. Rising US bond yields and a stronger dollar dented risk appetite in the market on Friday and seemed to exacerbate losses for GBP/USD, which came close to revising multi-year lows under 1.18 support ahead of the weekend.

Joseph Caporso, an analyst at the Commonwealth Bank of Australia, said: “FOMC Chairman Powell is due to speak on Friday (midnight Sydney time). His speech was the first since the Federal Open Market Committee’s policy meeting in late July. We expect Powell to deliver an upbeat message on inflation in line with recent comments from FOMC officials. There is room for market pricing to raise the money rate, and to support the US dollar.”

Focus on Jackson Hole Symposium

The highlight of this week is Fed Chairman Jerome Powell’s speech at Jackson Hole’s annual symposium next Friday due to its potential to influence market expectations of US interest rates in September and beyond. However, before then, a number of US economic figures are due, and each will help determine market appetite for the dollar in the coming days.

This includes the second estimate of US GDP for the fourth quarter and the July reading of the Fed’s preferred measure of US inflation, the core PCE price index, which markets will be scrutinizing closely for anything to support signs of the mild inflation pressure recently noted in official actions. With financial markets recently expected to cut the September rate hike to 0.50% for the Federal Reserve, GBP/USD will be at risk this week from anything that pushes market rates back in favor of a larger 0.75% increase.

Anything could lead the market to abandon recent bets that the Federal Reserve may rush to cut US interest rates next year. At the same time, Flash PMI releases will provide a glimpse into how the UK economy is holding up. While sterling short positions have been cleared this week, we don’t see any major moves in sterling against the dollar until September.

Sterling dollar forecast:

• The recent losses of the GBP/USD currency pair pushed the technical indicators towards oversold levels.
• Forex traders will be in a cautious position to buy the currency pair as the strength of the US dollar continues.
• Currently, the closest support levels for the currency pair are 1.1720, 1.1650 and 1.1580, respectively, and from the last two levels, you can consider buying the currency pair with no risk.

On the other hand, breaking the resistance 1.2100 will be important to form an opposite channel for the current sharp bearish situation. The sterling will be affected by the announcement of the PMI readings for the manufacturing and services sectors in Britain.

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Rallies should continue to be a selling opportunity, especially as the 1.20 level above is a large, round, psychologically significant figure, 

• The GBP/USD pair has fallen significantly during the trading session on Friday as we ended the week.
• The market now looks likely to continue dropping given enough time, but ultimately, it’s a question of how quickly it’s going to happen. 
• The US dollar has been like a wrecking ball against almost everything, the British pound won’t be any different.
• The Bank of England has recently admitted that the British economy is almost certainly going into recession.

When you look at this chart, it’s obvious that the downtrend is very strong, and it will more likely than not continue. If we break down to a fresh, new low, then it’s likely we go down to the 1.15 level. The 1.15 level opens up the possibility of a move down the parity over the longer term. I think that’s a bit of a stretch, but I would also have said that 1.18 would be a stretch just a year ago. Rallies at this point in time should continue to be a selling opportunity, especially as the 1.20 level above is a large, round, psychologically significant figure, and an area that previously had a certain amount of support. That could bring in a certain amount of “market memory” in a market that continues to see a lot of reasons to drop.

How do interest rates affect the GBP/USD pair?

Keep in mind that the interest rates in America continue to climb in relation to other ones, so even if it does see a little bit of a pullback, the reality is that the spread between the United States and other economies should continue to cause downward pressure. In fact, it’s not until we can break above the 1.25 level, maybe even the 1.26 level that I would consider this a market that you can buy. Obviously, you need to see a little bit of a bounce in order to show signs of exhaustion or a continuation to start shorting yet again. I would not chase the trade in this area but would follow other traders. Ironically, one of the most obvious signals would be if the EUR/USD pair closes below parity on a daily close, even though it has nothing to do with this pair whatsoever. Either way, I have no interest in buying anytime soon and I would like to fade any signs of a bounce that fails.

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Significant short-term bearish momentum in market sentiment.

Amid the recovery of the US dollar in the forex market, the pound sterling was the main loser against it. Accordingly, the Pound sterling fell against the dollar, GBP/USD, to the support level of 1.1792, the closest to its lowest during the trading of the year 2022. It closed trading last week, stable around the 1.1825 level. The pair’s losses pushed the technical indicators towards oversold levels However, the weakness factors still warn of further losses for the currency pair. This week, the US dollar will be the focus of investors’ attention, and this time it will be monitoring to announce the growth rate of the US economy, and what will be mentioned in the Jackson Hole symposium organized by the US Federal Reserve. Jerome Powell’s statements in this event will receive more attention and monitoring.

GBP/USD Economic Analysis

The GBP/USD currency pair is trading affected by the announcement that the US initial jobless claims for the week ending August 12th exceeded expectations at 265 thousand with the number of claims recorded at 250 thousand. Continuing claims also exceeded 1.438 million with a proceeds of less than 1.437 million. Prior to that, US retail sales figures for July exceeded expectations at 0.6% with a growth rate of 0.8%. On the other hand, US general retail sales for this month came out against expectations (MoM) at 0.1% with a change of 0%.

From the UK, UK CPI for July rose again to 10.1% (y/y) compared to expectations of 9.8% and 9.4% recorded in the previous month. The change (MoM) was 0.6% compared to a forecast of 0.4% but lower than the previous month’s 0.8%. The seasonally adjusted core PPI for July outperformed the forecast (MoM) by 0% with a print of 1%. On the other hand, the equivalent (on an annual basis) beat expectations at 15.9% with a rate of 14.6%.

There has been a sudden rise in retail sales, but consumer confidence is dropping to a 50-year low. Despite rising British inflation, UK retail sales surprised with growth in July, despite the much-watched gauge of consumer confidence dropping to an all-time low.

As announced, UK retail sales volume rose 0.3% in July 2022 after declining 0.2% in June 2022, according to the Office for National Statistics. This exceeded expectations as the consensus was looking for another reading of -0.2%. Retail sales are now down 3.4% y/y, slightly worse than the consensus had expected of -3.3%, but up in June -5.9%. The Office for National Statistics notes that despite a better-than-expected result for July, retail sales have been trending downward since the summer of 2021.

The data showed that for most categories, although the total value of goods sold increased in many cases, the quantities sold decreased. This reflects the effect of higher prices which raise the amount of money in circulation but at a lower turnover. The data comes in the same week that the UK reported year-on-year inflation growth of 10.1% for the month of July, with the Bank of England expecting the peak to be closer to 13%. Given the rising inflation expectations, other data released on Friday showed that British consumer confidence fell to another record low.

According to the advertiser, the GfK consumer confidence gauge fell to an all-time low of -44 in August, from a reading of -41 in July. At -60, a sharp drop in consumers’ expectations for the economy in the next 12 months was one reason for this record result. GfK says the result was due to a persistent rise in inflation, which is expected to peak later in the year.

Although the retail sales data for July beat expectations, the outlook remains tough. The upside surprise was driven by a massive 4.8% m-o-m increase in out-of-store retail, i.e. online. Comments from retailers suggest that this is due to a combination of online promotions that boost sales. Overall, the data released on Friday is clear: the British consumer is feeling the impact of higher prices and is likely to ease further, especially given that peak UK inflation is still some way off.

GBP/USD technical analysis

On both the short and long term, the recent losses of the GBP/USD pair pushed the technical indicators towards oversold levels. In the near term and according to the performance on the hourly chart, it appears that the GBP/USD is trading within a descending channel formation. This indicates a significant short-term bearish momentum in market sentiment. Therefore, the bears will look to extend the current declines towards 1.1800 or lower to 1.1720. On the other hand, the bulls will target potential recovery profits at around 1.2025 or higher at 1.2114.

In the long term and according to the performance on the daily chart, it appears that the GBP/USD currency pair is trading within the formation of a descending channel. This indicates a significant long-term bearish momentum in market sentiment. Therefore, the bears will look to maintain control of the pair by targeting profits at around 1.1660 or lower at 1.1295. On the other hand, the bulls will target potential retracements around 1.2241 or higher at 1.2605.

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