Gbp/usd Could Drop To As Low As 1.14 On A Three Months View

• Trade Ideas
• Weekly Signals
• 2022, 06 August

Brief:

Our Analysts  see risks that the GBP/USD pair may trade as low as 1.14 on a 1 to 3 month perspective. They warn that the scenario assumes another break below parity for EUR/USD.

“The Bank of England’s forecast of recession underpins the vulnerability of the pound going forward. The warnings on growth over-rode any support for the currency that may otherwise have been derived from the Bank’s 50 bps rate hike, the largest incremental move in 27 years. The UK is facing months of astoundingly high inflation levels faced by a period of disinflation during potentially 5 quarters of negative GDP growth. In politics, Liz Truss, the favourite to win the Tory party leadership race, continues her charm offensive aimed at Tory party members who will choose the next UK PM in September. Her policies, however, are not necessarily in line with investors’ needs. We see risk that cable could print as low at 1.14 on a 1 to 3 month view. This assumes a continued period of broad-based USD strength.”

Sentiment remains mixed, with most EU stocks closing with losses while US equities wobble. On Friday, the Department of Labor revealed that July Nonfarm Payrolls added 528K jobs to the US economy, smashing estimations of 250K. Additional data from the US jobs report illustrates that the labor market remains tight, with the Unemployment rate falling to 3.5% and Average Hourly Earnings increasing 0.5% MoM while, on an annual basis, rose by 5.2%

On Thursday, Cleveland’s Fed President Loretta Mester kept her hawkish stance. She said the rate path outlined by June dot plots is “about right,” while adding that a 75 bps for September is “not unreasonable.”

Elsewhere, the Bank of England Chief Economist Huw Pill crossed wires via Bloomberg. He said that the BoE would return to its 2% inflation target but added that “it’s going to be a process, which is going to take time reflecting the magnitude of shocks we’ve seen,” on Friday. Those remarks came one day after the “old lady” raised rates by 50 bps, the most in 27 years, lifting the Bank’s Rate to 1.75%, and warned that the UK might tap into a recession by the year’s end.

All that said, the GBP/USD prepares to finish the week with losses. The resilience shown by the US economy so far, with ISM PMIs holding the fort in expansionary territory and a solid labor market, paints a positive picture for the greenback. Contrarily, the stagflationary scenario looming in the UK, we can conclude that the Sterling’s weakness could remain towards the next week.

What to watch

Next week, the UK economic docket will feature RICS House Price Balance as the only market mover data. The US docket will feature the Inflation data, namely consumer and producer indices, Initial Jobless Claims, and the University of Michigan’s Consumer Sentiment for August.

Suggestion:

Sell below 1.3200 for 1.1415 and 1.1000

Else

Buy above 1.3200 for 1.3700 and 1.4375