The pound was able to find some love from favourably revised growth figures this morning after getting an absolute pounding in the last couple of days. The GBP/USD, which has been among the hardest hit pound crosses, owning to the simultaneous upsurge for the US dollar, managed to get eke out a small gain. But given the warning about future growth from Andrew Bailey, Bank of England Governor, the dollar’s strengthening momentum, and the technical damage the cable has incurred in the last few days, the risks remain skewed to the downside in the short-term outlook.
The GBP/USD slumped in the previous two sessions after Mr Bailey said that the supply chain crisis risks derailing UK's economic recovery until next year. However, revised data released this morning showed the economy had actually bounced back faster than previously thought. GDP grew 5.5% in the second quarter as it emerged from the winter lockdown. This was sharply better than 4.8% reported initially and expected.
But that was the past. What matters is the future. Judging by this week’s sharp selling, investors are no longer confident that the economy is on a sustainable path of recovery and that it is facing stagflation risks. Bailey’s remarks implies that the BoE will not aggressively tighten its belt. Although inflationary pressures are increasing sharply – with UK gas futures exceeding £2.50 per British thermal units to hit a fresh record today – Bailey’s warning that the UK economy is facing strong headwinds because the services sector has not recovered as strongly as had been expected means any rate hikes would be done so for the “wrong” reasons. That is, to prevent very high levels of inflation derived from energy prices spikes and temporary factors, rather than because of growth warranting tighter policy.
Because of that, that pound selling is probably not done just yet. This week’s selling has been exacerbated by the fact key support in the $1.36 area broke, which gave rise to momentum selling and long covering below this hurdle. The next line of defence around 1.35 hurdle also broke down. So the area between 1.35 to 1.36 (shaded) is going to be a major hurdle going forward. For as long as rates hold below that area, the path of least resistance would remain to the downside. Any fresh selling pressure is likely to send the cable towards the support trend of the bearish channel around 1.3350 next, with the long-term 38.2% Fibonacci level at 1.3167 being the next major downside target.
Source: ThinkMarkets and TradingView.com
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