GBP/USD: How Low Can It Go?
With the British government taking a battering in the bond markets and stronger-than-expected US economic data, we explore how low GBP/USD could sink in the weeks ahead.
A Crisis of Confidence: Weak UK Fiscal Plans Meet Strong US Data
The recent slide in GBP/USD reflects a perfect storm of weak UK fiscal credibility and robust US economic performance. Friday’s US Nonfarm Payrolls report showed 256,000 jobs were added in December, far exceeding expectations of 160,000. Combined with a drop in the unemployment rate to 4.1%, this data underscores the resilience of the US economy and has led markets to price in higher-for-longer interest rates. The US Dollar, as a result, has surged, pushing the Dollar Index to a two-year high.
Across the pond, the UK faces a credibility gap in its fiscal strategy under the Labour government. Rising gilt yields, now at their highest levels since 1998, mirror market scepticism over the sustainability of public finances. Concerns around higher borrowing costs and the potential for stagnation are exacerbated by the government's promise not to seek new borrowings for day-to-day expenses—a pledge that many view as increasingly untenable. While officials attempt to reassure markets, the lack of a cohesive plan is adding to the downward pressure on the Pound.
3 Technical Tools to Gauge How Low GBP/USD Might Fall
GBP/USD has been under heavy selling pressure since September, carving out a series of lower swing highs and lower swing lows on the daily candle chart. This prolonged downtrend has triggered a 'death cross,' where the 50-day moving average has crossed below the 200-day moving average. While this lagging indicator is often seen as a signal of continued bearish momentum, it’s worth noting that it reflects the strength of the existing trend rather than predicting future moves.
To gauge how low GBP/USD might fall, we’ve employed three key price action tools:
1. Descending Channel
Drawing a descending channel around GBP/USD’s decline highlights the approximate volatility of the downtrend. The pair is currently nearing the lower boundary of this channel, suggesting a potential area where buyers might step in.
GBP/USD Daily Candle Chart
Past performance is not a reliable indicator of future results
2. Relative Strength Index (RSI)
The RSI has broken below 30, indicating oversold conditions. However, there is no bullish divergence—a signal that could suggest weakening bearish momentum—indicating the downtrend remains intact for now.
GBP/USD Daily Candle Chart
Past performance is not a reliable indicator of future results
3. Historical Inflection Points
Looking left on the weekly candle chart reveals key support levels. GBP/USD is approaching the October 2023 lows. If this level fails to hold, the next significant supports lie at the March 2023 lows, followed by a steep drop toward the September 2022 lows. These levels represent critical areas where the pair could stabilise or reverse.
GBP/USD Weekly Candle Chart
Past performance is not a reliable indicator of future results
Summary:
GBP/USD remains firmly in bearish territory, with both fundamentals and technicals pointing to further downside risks. Traders can focus on key support levels, RSI divergence and candle patterns to determine the timing of any short-term bounce.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
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