Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.1500.
- Add a stop-loss at 1.1180.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 1.1250 and a take-profit at 1.1150.
- Add a stop-loss at 1.1350.
The GBP/USD price rose slightly as the market focused on the political situation in the UK and the rising possibility of a recession in the country. It rose to a high of 1.1310, which was the highest point since Thursday.
UK political crisis
The political crisis in the UK took another turn last week after Liz Truss resigned after 44 days in power. Her resignation means that the UK will now have a new prime minister in the coming days.
It came a few days after the new UK chancellor announced plans to undo Kwasi Kwarteng's debt-fueled tax cuts. He will also undo some parts of Liz Truss' energy subsidies.
Therefore, economists expect that the UK will be in a recession in the coming months. In a report, EY said that the country is facing the potential for a recession in the coming three quarters. The company expects that the economy contracted by 0.3% in the third quarter followed by 0.2% in Q4 and Q1'23.
EY downgraded UK's economic due to the soaring inflation, high-interest rates, and global economic weakness. Data published last week showed that the headline inflation rose to 10.1% in October while core inflation surged to 6.5%. Analysts at EY expect that inflation will average 8.9% this year and 5.5% in 2023 and fall below 2% in 2024.
Additional data from the UK showed that the country’s retail sales dropped sharply in September. It declined by 1.4% in September, which was lower than the median estimate of 0.5%. Food store sales dropped by 1.8%. It was the first time that sales have crashed below pre-pandemic levels.
The key data to watch on Monday will be upcoming American and UK flash manufacturing and services by S&P. Economists expect the data to show that business activity declined in October amid soaring inflation. However, historically, PMIs have a little impact on the US dollar.
GBP/USD forecast
The four-hour chart shows that the GBP/USD price rose slightly and reached a high of 1.1298, the highest point since Thursday. It moved slightly above the 50-day EMA and the standard pivot point. At the same time, the Relative Strength Index (RSI) rose above the neutral point at 50.
Sterling is at the 50% Fibonacci Retracement level. The pair will likely continue rising as buyers target the next psychological level at 1.1500.
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