Technical Analysis

GBP/USD Drops To Lowest Levels Since March 2020

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    The pair managed to erase early losses and trades virtually unchanged on Wednesday. The GBP/USD pair was weighed by cautious comments from the Bank of England officials, while the U.S. dollar strengthened somewhat, with the hitting a fresh cycle high of 110.78.

    At the time of writing, the cable trades little changed at the 1.1530 area, bouncing sharply from a low of 1.1404, last seen in March 2020. BoE officials testified before the Parliament’s Treasure Committee. The Governor, Andrew Bailey, stated that the current high rate doesn’t prove that the bank’s operations were a failure, noting that “we can always learn from experience.”

    He also commented that the cause of the U.K. economy tipping into a recession is solely Russia’s fault. In addition, the other officials didn’t give a clear pathway for the bank’s monetary policy. Chief Economist Hugh Pill noted that he can’t “speculate yet” on the bank’s response to the proposed energy cost caps or the moves to cut inflation.

    At the same time, Silvana Tenreyro favored a more gradual pace of tightening to reduce the risk of overshooting and said the BoE should be moving slowly when there is a lot of uncertainty. After these comments, the WIRP tool suggests that tightening expectations have eased.

    The markets are betting on 55% odds of a 75 bps hike in the Sept. 15 meeting, while at the start of the day, the probabilities stood at 70%. Next year, the market participants are pricing in 250 bp of tightening over the next 12 months, which would see the policy rate peak near 4.25% as opposed to 4.5% at the start of the week.

    The GBP/USD short-term outlook remains bearish from a technical perspective, according to the daily chart. The RSI hovers in oversold territory for a seventh straight day, while the MACD prints red bars, although slightly easing.

    On the downside, the 1.1405 level offers strong support. If lost, the cable could extend its fall to the 1.1350-1.1300 area, marking a low since the mid-1980s.

    On the other hand, the bulls need to regain the 1.1500 area to ease the immediate selling pressure and pave the way to yesterday’s high of 1.1608 and the 1.1680 zone.

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