25.09.202312:17 Forex Analysis & Reviews: GBP/USD: Downward trend gains momentum

The GBP/USD pair has hit a six-month low, marking itself near the 1.22 level. The last time the British pound was in this price range was in March of this year. It's still a considerable distance away from this year's price low of 1.1802, about 400 points. However, the downward momentum and the established fundamental backdrop for the GBP/USD pair are contributing to the achievement of this target.

The Bank of England, which concluded its September meeting last week, added additional pressure on the pound. The central bank chose not to raise interest rates for the first time since December 2021, accompanied by relatively dovish comments. Furthermore, the voting results of the committee members were disappointing for GBP/USD buyers, as the balance of power shifted significantly, with the so-called "dovish wing" gaining strength. The British pound essentially found itself without allies against the strengthening greenback, causing the downward trend to regain momentum.

It's worth noting that the outcome of the Bank of England's September meeting was not predetermined. While most experts leaned toward a pause, some currency strategists warned their clients that the Bank of England might opt for a 25-point rate hike, given that wage growth remains high, and the core consumer price index is elevated.

The latest release of inflation data in the UK left a mixed impression. For instance, the overall consumer price index on a monthly basis, on one hand, emerged from negative territory (it recorded a decline of -0.4% in July), but on the other hand, it demonstrated minimal growth (0.3% compared to an expected increase of 0.9%). The core consumer price index, excluding energy and food prices, sharply declined (down to 6.2%), while the producer price index and producer output price index ended up in the "green zone."

However, overall, the release indicated a slowdown in inflation in the UK. This fact allowed for the assumption that the English regulator would adopt a wait-and-see position, keeping the parameters of monetary policy unchanged.

And so it happened. Out of the nine members of the Monetary Policy Committee of the central bank, five voted against raising the rate. Four members voted in favor of a 25-point rate hike, bringing it to 5.5%. Note that in the previous meeting, only one committee member voted to maintain the status quo (eight of his colleagues voted for tightening monetary policy).

The accompanying statement had a cautious and rather pessimistic tone. In particular, the central bank lowered the GDP growth forecast for the UK to 0.1% (the previous forecast was at 0.4%). It's worth recalling that in July, the British economy contracted by 0.5% on a monthly basis (the worst result since December 2022). In quarterly terms, the figure also ended up in the "red zone," rising by 0.2%, compared to a forecast of 0.4%.

Commenting on the updated forecast, members of the central bank expressed concern that the production volume in the United Kingdom declined by 0.5% in July, and the number of job vacancies is steadily decreasing. It's worth recalling that according to data published in September, the unemployment rate in the United Kingdom has risen to 4.3%. In this case, we can speak of a negative trend, as this indicator has been rising for the third consecutive month.

In other words, the current fundamental picture supports the Bank of England's decision to maintain the status quo. According to analysts from Goldman Sachs and Nomura, the interest rate has already reached its peak. BoE Governor Andrew Bailey indirectly confirmed this assumption, stating that further tightening of monetary policy would only be necessary if there are signs of more sustained inflationary pressure. He also promised that the rate would remain "at a sufficiently high level" for an extended period to bring inflation back to the 2% target.

In other words, the Bank of England has followed in the footsteps of the ECB. However, unlike the English regulator, the European Central Bank raised interest rates "at the end" while hinting at the end of the current tightening cycle. The Bank of England decided to "slam the door" without a final chord.

Thus, the downward dynamics of GBP/USD are entirely justified. The pound is weakening due to the dovish stance of the Bank of England, while the dollar is holding steady due to the hawkish stance of the Federal Reserve. All this indicates that the pair has not yet exhausted its potential for decline.

From a technical perspective, on the H4, D1, W1 timeframes, the pair is trading between the middle and lower Bollinger Bands lines. On the daily chart, the Ichimoku indicator has formed a bearish "Parade of Lines" signal, which also suggests a preference for downward movement. Corrective pullbacks may be used for opening short positions. The nearest target of the downward movement is the level of 1.2180, which is the lower Bollinger Bands line on the daily chart. The main target is located much lower, at the psychologically significant level of 1.2000, which is the upper boundary of the Kumo cloud on the weekly chart.