Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2700.
- Add a stop-loss at 1.2825.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.2775 and a take-profit at 1.2825.
- Add a stop-loss at 1.2700.
The GBP/USD exchange rate wavered in the overnight session as investors embraced a risk-off sentiment in the market. The pair was trading at 1.2765 on Tuesday morning, a few points above this month’s low of 1.2710.
Risk-off sentiment
The GBP/USD was in a tight range as the US dollar index and equities slumped. The US dollar index fell by over 50 basis points and moved to $102.50, its lowest point in months.
At the same time, US equities sunk, with the Dow Jones, Nasdaq 100, and S&P 500 indices falling by over 2.70%, 3.75%, and 3.17%, respectively. The closely-watched VIX index jumped by over 60%.
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This risk-off sentiment emerged after the Bank of Japan (BoJ) decided to hike interest rates last Wednesday. That move led many investors to start unwinding their carry trades that have existed for many years.
The sentiment also continued as signs of a US recession increased. Data released on Friday showed that the labor market had some serious weakness as the unemployment rate rose to 4.3%, its highest point in two years.
Therefore, strategists are trying to time the next Fed actions. Those at Jefferies expect the bank to deliver an emergency rate cut before its scheduled meeting in September. UBS analysts expect the bank to slash rate by 50 basis points while ING sees three cuts. Some analysts believe that the Fed is behind the curve.
There will be no major US economic data this week. Instead, traders will be waiting for next week’s consumer inflation report. A sign that inflation continued falling, coupled with more stock sell-offs will push the Fed to deliver an emergency rate cut later this month.
Most analysts also expect that the Bank of England (BoE) will continue cutting interest rates later this year.
GBP/USD technical analysis
The GBP/USD pair has been in a strong downtrend after peaking at 1.3043 in July. It has recently dropped below the key support level at 1.2861, its highest swing on June 12th. The pair has also formed a descending channel pattern. It has continued to form lower lows and lower highs.
Also, the GBP/USD pair has dropped below the 50-period and 25-period exponential moving averages. Therefore, the path of the least resistance is lower, with the next point to watch being at 1.2700.
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