Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.0920.
- Add a stop-loss at 1.1400.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.1325 and a take-profit at 1.1450.
- Add a stop-loss at 1.1250.
The GBP/USD price retreated slightly as the market focused on the political situation in the UK. It dropped to a low of 1.1213, slightly below this week’s high of 1.1438. This price was about 8.2% above the lowest level in September.
UK political situation
The political situation in the UK worsened as Tory members plotted how to replace Lizz Truss as their party leaders. This happened after her new Chancellor was forced to undo some of the tax cuts that Kwasi Kwarteng unveiled.
In her speech in parliament, Truss apologized for the tax cuts and vowed to remain in power as the country faces substantial challenges. Still, there is a likelihood that she will not last for long. For one, Suella Braverman, her Home Secretary resigned and others are expected to follow suit. As such, the world’s sixth-biggest economy faces a prolonged period of political uncertainty, hurting its recovery.
Meanwhile, data published on Wednesday showed that the country’s inflation is still elevated. The headline consumer inflation rose by 0.5% from August to September. This translated to a 10.1% annual increase, which was higher than the median estimate of 10%.
Core inflation rose by 6.5% in September as the cost of most items continued rising. Analysts expect that inflation will continue rising in the coming months as the government’s support for the energy sector eases. A few months ago, analysts at Citigroup estimated that inflation will rise to 18.3% without the energy support.
The Bank of England is expected to hike interest rates for the eighth time in November. With inflation at these levels, it will likely hike by either 75 or 100 basis points.
The next key data to watch will be the latest existing home sales numbers. Economists expect that sales dropped from 4.80 million in August to 4.70 million in September.
GBP/USD forecast
The GBP/USD pair pulled back after the latest UK inflation data and as the political uncertainty continued. It dropped to a low of 1.1190, which was the lowest point since last Friday. As it dropped, it moved below the 25-day and 50-day moving averages.
The the Relative Strength Index (RSI) moved below the neutral point at 50. It has also formed a double-top pattern, which is usually a bearish sign. Therefore, the pair will likely continue falling as sellers target the neckline of the double-top at 1.0920.
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