Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.1650.
- Add a stop-loss at 1.1800.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.1800 and a take-profit at 1.1900.
- Add a stop-loss at 1.1700.
The GBP/USD price retreated after a series of worrying news about the UK economy and as volatility jumped. The pair dropped to a low of 1.1742, which was the lowest level since March 23rd this year. It has dropped by over 17% from the highest point this year.
Worries about the UK economy
The GBP/USD currency pair retreated sharply after some worrying economic numbers from the UK. In a report on Monday, Citigroup said that the country’s inflation will hit about 18.6% in January. If this happens, it will be the biggest increase in almost 50 years.
The investment bank attributed the sharp increase of inflation to the soaring wholesale gas prices. It estimates that the retail energy price cap will rise to 4,567 pounds in January and to 5,816 pounds in April next year. That will be a big increase considering that the current price is at 1,971 pounds.
The estimate by Citigroup is bigger than what the Bank of England (BoE), Goldman Sachs, and EY estimate. In its monetary policy meeting this month, the BoE estimates that inflation will start the year at 13.3%. Goldman and EY believe that inflation will be at least 15%.
The GBP/USD price also declined after the Office of National Statistics (ONS) revised the UK economic growth for 2020. In a report, the agency said that the country’s GDP contracted by 11% in 2020, the worst performance in the G7. It was also the worst contraction since 1,709. As a result, the growth in 2021 and 2022 will be staring at a lower point than estimated.
The pair also declined because of the broad US dollar strength. The dollar index rose to $109, the highest level in a month. Similarly, the VIX index, which is a good measure of volatility, rose by over 15% while stocks retreated.
GBP/USD forecast
The GBP/USD price has been in a strong bearish trend in the past few days as the US dollar strength continued. It managed to move below the important neckline of the double-top pattern.
The pair’s downward trend is being supported by the 25-day and 50-day moving averages while the Relative Strength Index moved to the extremely oversold level. It has also formed what looks like an inverted cup and handle pattern. Therefore, the pair will likely continue falling as sellers target the next key resistance point at 1.1650.
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