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Hi, dear traders! According to the H1 chart, GBP/USD slumped by 500 pips on Monday, but managed to recoup its losses later. At the moment of writing, the pair traded near the opening level of this week, indicating that the pound sterling has managed to escape heavy losses so far. However, the 500 pips drop is a cause for concern. The UK economy is sinking. Economists have been forecasting a steady recession in the UK since Brexit, but COVID-19 pandemic and the conflict between Ukraine and Russia have severely affected the UK. Amid sanctions, prices of oil and gas surged upwards, and the economy has faced soaring inflation. Due to high energy prices, households and businesses require assistance to prevent lay-offs, bankruptcies, and falling industrial output.
In any case, the UK economy has already taken a hit. Now, traders await the response from the government. Many found economic measures by Liz Truss's government to be unsatisfactory, particularly tax cuts. These tax cuts would lead to a massive budget deficit and would have to be funded through external borrowing. While this may be beneficial for households and businesses, it is not a good decision for traders willing to go long on the pound sterling. In comparison, the US dollar remains stable and continues to be the reserve currency of choice, despite all perturbations of the past several years. Traders ignore the fact that the US economy has already entered a recession and welcome the Fed's monetary tightening measures that are slowing down the economy.
According to the H4 chart, the pair settled below the Fibo level of 200.0% (1.1111) and could fall towards the retracement level of 261.8% (1.0146). GBP/USD has already covered most of the 1000 pips distance between these levels. The recent upward correction, which happened yesterday, would not prevent the pound from sinking even deeper.
Commitments of Traders (COT) report:
Non-commercial traders became less bearish on GBP/USD over the past week. Traders opened 160 Long positions and closed 13,083 Short positions. However, most major players remain predominantly bearish, and open Short positions outnumbers Long positions greatly. The latest report and the events of the past few days make a GBP/USD uptrend unlikely. Major players have largely remained bearish on GBP, and slowly became more bullish, opening more long positions. However, the pound continues to sink, and it would take a long time for traders to become predominantly bearish. At this point, current events suggest that GBP could decline indefinitely.
US and UK economic calendar:
US - Durable Goods Orders (12-30 UTC).
The sole data release in the US is unlikely to influence traders.
Outlook for GBP/USD:
Earlier, traders were recommended to open new short positions if the pair closed below 1.1496 on the H4 chart with 1.1111, 1.1000, and 1.0729 being targets. GBP/USD has already hit all these targets. Opening new long and short positions is not recommended at the moment.
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