02.09.202210:42 Forex Analysis & Reviews: GBP/USD: 5% fall not worst outcome for GBP

Despite being oversold, GBP broke through 1.1530 on Thursday. The currency is likely to remain bearish although it is now retracing up. Meanwhile, USD could strengthen against the basket of major currencies should the jobs market report for August come in strong.

Yesterday, GBP/USD fell below 1.1580, briefly touched 1.1499, rebounded, and consolidated at 1.1530. In the upcoming days, the pound is expected to fall below 1.1500 due to being oversold.

Support is seen at 1.1460. The price is unlikely to show strong growth. However, should bulls gain control over the market and hit 1.1605, the pound could stabilize for a while.

In the long term, GBP/USD is projected to remain bearish as well. A gloomy forecast has recently come from Capital Economics.In the coming months and next year, the pound is likely to hit its lowest level versus the greenback. Meanwhile, the euro is expected to show a modest fall.

If the British economy contracts by 1% and inflation is at a record rate, the Bank of England will hardly provide any support, so the pound will probably extend the downtrend. We see GBP down by 5% by the end of 2022, experts at Capital Economics wrote.

The current steep drop in the pound is due to the stronger US dollar. Still, there is also an internal factor, the sterling is weaker against other currencies, including the euro, being under pressure from sales.

The United States and the United Kingdom are in completely different positions. The UK has already slipped into a recession, while the US has a chance to avoid it. The recent spike in UK wholesale gas prices indicates that the country is now dealing with a deep and prolonged recession.

The greenback is also strong due to decreased risk appetite as investors fear a global economic downturn. It is commonly known that the greenback gains and the pound suffers losses during turmoil. The pound is acting more like a risk asset due to a massive current account deficit in the UK.

The Bank of England's stance on interest rates is also weighing on the pound. The regulator can't afford to act even more aggressively. So, the pound is likely to lose even more.

The Bank of England is planning a 50 basis-point rate hike, but markets hope for a bigger increase. They anticipate the Bank of England to be more decisive that any other central bank due to record inflation in the country.

In order to raise interest rates by 180 basis points by the end of the year, the regulator should make at least one 75 basis-point move. However, there have been no signs of such a likelihood so far.

In light of the continuing downtrend, the forex market seems to have long realized that the Bank of England will not live up to these expectations.

According to Capital Economics, interest rates will be raised at a slower pace than investors hope. Meanwhile, the ECB's and the Fed's actions will satisfy market expectations.

GBP/USD is seen falling to the all-time low of 1.0500 by the middle of 2023.

EUR/USD could sink as low as 0.9000 by that time, Capital Economics said. Meanwhile, EUR/GBP could reach 1.1700.