It’s been another exciting week in financial markets. Several key moves have kept traders on their toes this week and as we draw to a finish the main attraction appears to be the sell-off in GBP. We’ve had plenty of record action recently, such as the massive decline in JPY, and this week was no different. GBPUSD fell to its lowest level since June 2020. So, let’s take a look at what caused the move and, as ever, if you caught it? Well done! If not? There’s always next week.
What Caused the Move?
BOE Issues Dire Warning
The main catalyst behind the latest plunge in GBP was the May BOE meeting on Thursday. While the bank hiked rates by .25% as expected, the accompanying statement highlighted a much bleaker outlook than bulls were hoping for.
BOE governor Bailey warned that the UK was facing a “massive downturn” over the remainder of the year as a combination of soaring energy prices, rampant inflation and ongoing supply-chain issues takes its toll. The BOE’s latest forecasts included heavy upward revision to its inflation view with the bank now forecasting CPI to peak around 10% by early next year. Bailey warned that severe impact on real incomes was unavoidable and that inflation would take around two years to moderate and fall back to the bank’s 2% target.
With the bank now forecasting an even tighter squeeze on consumers over the rest of the year, rate path expectations have moderated. Nevertheless, two members of the BOE were seen voting in favour of a larger .5% hike, reflecting the growing rift within the BOE as it tries to deal with current UK economic conditions.
Political Uncertainty Grows in the UK
Away from the BOE, the latest set of local elections in the UK put further downward pressure eon the pound. The leading UK Conservative party was seen losing 131 seats while the main opposition gained 87 seats. The results have added to the sense of political uncertainty in the UK on the back of a long list of government scandals.
The sell-off in GBPUSD this week has seen the market breaking down through the prior 2022 lows at 1.2426. Price is currently testing the bear channel support level and, while beneath the 1.2426 level, the focus is on a further push lower. Bearish MACD and RSI readings support a continued decline with 1.2022 the next bear target to note.