Recession Fears Leave the GBPUSD Rudderless

28 Jun 2022

After bouncing strongly off 1.1933, which is the lowest point since March 2020, GBPUSD is now consolidating in a narrow range with a lack of directional conviction. The US Dollar Index (DXY) which gauges the greenback’s strength against a basket of rival currencies, slid below 104 amid the USD sell-off after hitting an almost 20 year high of 105.79 in mid-June. The sideways movement indicates indecision among buyers and sellers.

40-year high UK inflation

Amid the global inflation, the United Kingdom also suffers soaring inflation with a reported 40-year high Consumer Price Index (CPI) in May 2022. The CPI is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. Used as a key indicator to measure inflation, the May CPI hit 9.1%. A figure that was in line with market consensus and higher than the previous months reading.

Typically, a high inflation would be bullish for a currency, as its central bank would step in sooner to fight the inflation by tightening monetary policy. However, huge increase to the interest rates in a short timespan could induce a “hard landing” where the economy rapidly shifts from expansion to contraction because of heightened cost of borrowing as the government attempts to bring down inflation with rate hikes.

As the market anticipates a recession to hit the US economy amid the hawkish Fed, many suspects that the UK is already in recession. The Bank of England (BoE) started raising interest rates in December 2021 and recently marked the fifth consecutive hike in June bringing the current base rate to 1.25%. At the same time, UK’s output had last grown in January and had since stagnated and contracted in April.

Concerns on the looming recession may drive down demand, which would cool off price pressures and taper the need for BoE to raise interest rates. This represents a risk that would weigh on the GBPUSD.

Technical Analysis

GBPUSD continues on the downtrend that started in June 2021. At the time of analysis on 28 June 2022, the pair is capped by the 20 exponential moving average (20 EMA) trend line resistance. Beyond this dynamic resistance, GBPUSD will also face resistance at the descending trend line resistance that the pair had failed to penetrate above since April 2022. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are in the bearish zone but showing signs of waning downside momentum. This is seen in the bullish divergence on RSI where prices logged lower lows while RSI had higher lows.

Looking ahead, as long as GBPUSD stays below 20 EMA and the aforementioned descending trend line resistance, we anticipate the pair to retest 1.215 (S1).

Tuesday, June 28

GBP – BoE’s Cunliffe speech

USD – Housing Price Index (MoM)(Apr), S&P/Case-Shiller Home Price Indices (YoY)(Apr), Consumer Confidence(Jun)

Wednesday, June 29

USD – Core Personal Consumption Expenditures (QoQ)(Q1), Gross Domestic Product Annualized(Q1), Gross Domestic Product Price Index(Q1), Personal Consumption Expenditures Prices (QoQ)(Q1), Fed’s Chair Powell speech

GBP – BoE’s Governor Bailey speech

Thursday, June 30

GBP – Gross Domestic Product (QoQ)(YoY)(Q1)

USD – Core Personal Consumption Expenditures – Price Index (MoM)(YoY)(May),          Initial Jobless Claims(Jun 24), Personal Income (MoM)(May), Personal Spending(May), Chicago Purchasing Managers’ Index(Jun)

Friday, July 1

GBP – S&P Global/CIPS Manufacturing PMI(Jun)

USD – S&P Global Manufacturing PMI(Jun), ISM Manufacturing Employment Index(Jun), ISM Manufacturing New Orders Index(Jun), ISM Manufacturing PMI(Jun), ISM Manufacturing Prices Paid(Jun)


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