GBP/USD: Will the Pound Break?
GBP/USD is again on the backfoot on Friday as the mighty US dollar pushes the struggling British pound close to a 37-year low.
The British Pound to US dollar exchange, or cable as it’s known, is having a horrendous year. So far, the pound is down 16% against the greenback year-to-date and looks likely to fall further.
The United Kingdom faces several economic headwinds. Food and energy inflation is causing the worst cost-of-living crisis in great Britain since the late 1970s. Furthermore, Citibank recently upgraded UK inflation expectations into the 18-22% range, suggesting more pain lies ahead.
Another reason the pound is struggling is the uncertainty surrounding the new Prime Minister. Liz Truss, who just recently took over the role from Boris Johnson, faces immediate pressure to revive the economy. And if there is one thing investors don’t like, it’s uncertainty. Notably, UK government bonds (gilts) are under tremendous selling pressure as capital flees the UK. As such, Truss and her new untested Chancellor of the Exchequer, Kwasi Kwateng must take immediate measures to steady the ship, and stop the economy from sinking.
While the pound’s weakness is a major factor in GBP/USD’s poor performance, the US dollar is also playing a part. The greenback has appreciated considerably recently, buoyed by the higher-than-expected inflation data in the US earlier in the week. The Consumer Price Index surprised on the upside, indicating US inflation is far from slowing down. Subsequently, interest rate predictions continue to rise, with the markets now pricing benchmark borrowing costs of 4.25% in 2023. As a result, we see growing chances that GBP/USD could slide to a new multi-decade low.
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British Pound to US Dollar Forecast
The monthly chart shows GBP/USD is testing the key support of the 2020 low at 1.1409. So far, attempts to push sterling below the support have failed. However, considering the US dollar’s strength, it seems inevitable the pound will soon break lower. If this proves true, we expect to see fresh selling, targeting the 1985 low at 1.0545.
The bearish outlook remains valid as long as GBP/USD is below the psychological 1.2000 level. A recovery above 1.2000 opens the door to further pound strength. Which could lift GBP/USD back to the August high just below 1.2300.