The USD to GBP exchange rate has been in a strong bearish trend in 2023 as the US dollar and VIX index plunge has gained steam. After jumping to a multi-decade high of $115 in 2022, the US dollar index has slumped to about $101. Similarly, the VIX index, which is the best measure of volatility, has dropped to about $20. The USD/GBP will next react to the upcoming Fed and BoE decisions and NFP data.
This will be an important week for the USD/GBP price. Its importance started on Tuesday when the IMF released its update on the economy. In it, the agency warned that the UK will be in a recession in 2023 as it fights multiple challenges, including ongoing strikes by firms like Royal Mail and nurses. As such, it will slump by about 0.5% in 2023. Other developed countries like the US and Germany will see a slow recovery. Russia, the heavily-sanctioned country, will expand by about 1%.
The USD to GBP exchange rate will also react to Wednesday’s interest rate decision by the Fed. According to the Fed Rate Monitor tool, economists expect that the Fed will hike by 0.25%, which is lower than the 0.50% that it hiked in December. Before that, it had hiked rates by 0.75% for four straight months, pushing the official cash rate at its highest level in years.
The USD to GBP exchange rate will also react to Wednesday’s interest rate decision by the Fed. According to the Fed Rate Monitor tool, economists expect that the Fed will hike by 0.25%, which is lower than the 0.50% that it hiked in December. Before that, it had hiked rates by 0.75% for four straight months.
After the decision, the other key catalyst from the United States will be the upcoming January non-farm payrolls (NFP) data. These numbers will come at a time when the number of layoffs in the US are rising. On Tuesday, PayPal said that it will fire over 2,000 workers. Other firms that have announced mass layoffs are PagerDuty, Microsoft, and Alphabet.
Meanwhile, in the UK, the Bank of England (BoE) will also publish its decision on Thursday. Unlike the Fed, the BoE is battling a difficult animal known as stagflation. Economic growth is slowing, as warned by the IMF, while inflation remains at above 10%. Therefore, it is between a rock and a hard place since its decision will have a major implications. For example, an aggressive hiking policy will likely push the economy into a deeper recession while a lax policy will stir inflation.
The USD/GBP price has been in a strong downward trend in the past few weeks. This decline has seen the pair move below the 50% Fibonacci Retracement level. At the same time, the pair seems to be about to form a death cross pattern, which happens when the 200-day and 50-day moving averages make a crossover. The USD to GBP exchange rate has also formed a double-bottom pattern at 0.80 whose neckline is at 0.8445.
Therefore, at this stage, the outlook for the pair is neutral with a bearish bias. A drop below the key level at 0.800 will invalidate the double-bottom pattern and push the pair significantly lower. On the other hand, a move above the neckline of the double-top at 0.8427 will validate the double-bottom and the death cross and push it higher.
This post was last modified on Feb 01, 2023, 04:57 GMT 04:57