Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2050.
- Add a stop-loss at 1.2200.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.2150 and a take-profit at 1.2235.
- Add a stop-loss at 1.2080.
The GBP/USD strong downward trend gained steam as the US bond sell-off intensified and as the Tory party conference continued. The pair slipped to a low of 1.2097, its lowest point since March 17th.
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US dollar strength continues
The key driver for the GBP/USD pair was the strong US dollar as demand for the currency intensified. As a result, other currencies like the euro, Swiss franc, and the Japanese yen also tumbled against the currency.
A likely reason is that many investors, including sterling holders, are now moving to the higher-yielding US dollar. Money market funds, which are seen a high-quality assets, have seen their yield approach 6% recently. Therefore, many sterling holders are now comfortable switching to the safety of the US dollar, creating a good carry trade opportunity.
The GBP/USD pair also crashed as the US Treasuries sell-off gained steam. The 10-year and 30-year bond yields have soared to their highest levels in decades and the trend could worsen in the coming weeks. This trend is partially because of the rising fears that inflation is rebounding as energy prices rise.
The GBP/USD pair also dropped as traders watched the ongoing Tory conference. While Lizz Truss, the former prime minister, called for tax cuts, Chancellor Jeremy Hunt said that it was not the best time to slash them.
Rishi Sunak will address the members as he comes under fire for several actions, including the decision to axe some parts of HS2. It is unclear how these actions will impact the struggling British economy.
The next important data to watch will be the upcoming JOLTs job openings numbers. Economists expect the data to show that the openings rose to 8.83 million in August, higher than the previous 8.82 million.
GBP/USD technical analysis
The 4H chart shows that the GBP/USD pair has continued to fall in the past few months. It moved below the key support level at 1.2115, the lowest level on September 27th. Further, the Stochastic Oscillator and the Relative Strength Index (RSI) have continued falling recently.
The pair has also formed what looks like a double-bottom pattern. Therefore, bears need to move below the key support at 1.2115 to invalidate the double bottom. A move below that level will see it drop to the next key support at 1.2050.
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