Due to continued purchases of the US dollar thanks to strong expectations for raising US interest rates this year, the GBP/USD continued to move within its descending channel. The pair's losses reach the 1.2568 lowest support level, the lowest for the currency pair in more than two years. The pair settled around there at the beginning of trading Wednesday. For three trading sessions in a row, the GBP/USD is exposed to very strong selling, within a sudden downward movement that makes it vulnerable to more losses, especially if selling intensifies in global markets.
According to analysts, the recent jump in the value of the US dollar – the main driver of the downward rally in GBP/USD – is due to deteriorating global investor sentiment in contrast to developments in the interest rate markets.
Commenting on the performance, Stephen Gallo, FX Analyst at BMO Capital said: While much of the US dollar's strength this year has come from the rush of higher US dollar-denominated interest rates, this latest phase of US dollar strength appears to stem from reluctance. about taking risks.
This underscores why it is so difficult to bet on the dollar: it is a winner anyway, and this is likely to lead to further weakness in the GBP/USD pair. KBC Markets analyst Matthias van der Googt said, “GBP/USD suffered the third blow in a row, as it collapsed to the 1.27 low from 1.30+ levels early in last week's trading. The Queen's finances are also further exposed to Britain's rapidly developing cost-of-living crisis, as evidenced last week by the bleak morning data. Supporting the move towards the lowest level for the cable since September 2020.”
The RSI is now reading below 30 which is an indication that the market is in an oversold area. As such, oversold conditions to get rid of some near-term relief can be taken into account. However, any gains for the currency pair will be sold under the current conditions.
Commenting on the performance, Joe Manimbo, chief market analyst at Western Union, said, “The slide in global markets has reinforced the safer play, pushing the US dollar to a two-year high. The dollar moved to its highest levels in 2020 against the euro and the British pound, while it rose to its highest levels in more than a month against the Canadian dollar. ”Money remains in vogue, given the bleak outlook for global economic growth and heightened expectations for the Federal Reserve to raise interest rates significantly to combat inflation over the coming months, the analyst adds.
Accordingly, global markets were sold off at the start of the new week's trading due to news that Beijing may be the latest Chinese mega city to be closed. With the authorities taking a “zero virus spread” approach, the possibility increases that the world's second largest economy and the engine of global growth will suffer a significant slowdown.
Further congestion in global supply chains is also likely, adding to the already hot inflationary pressures. This is ultimately supportive of the dollar.
On the daily chart, the level of 1.3000 is still a dividing line for the direction of the GBP/USD currency pair between the current decline and the attempt to recover upwards. Stability below it so far supports the downside trend, and according to the performance over the time period, the losses moved the technical indicators towards oversold levels, but the continuation of the weakness factors may give the bears more movement to the bottom, reaching the support levels 1.2520 and 1.2400.
On the other hand, stability will remain above the psychological resistance 1.3000, which is important for a shift in the pair's current outlook. The GBP/USD pair is not awaiting important data today, and investor sentiment and the performance of global markets will be the drivers of the currency pair today.