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GBP/USD - The Risk of Recession Increases

Yesterday, our GBP/USD analysis was based on the GBP being unable to break above previous price highs and the risk of a UK recession. Today, we can see the significance of this resistance level and the recession risk growing with UK economic releases underperforming.

Today the GBP/USD pair declined by 60 PIPs, losing the gains of the previous 2 days. The Pound has managed to officially form 2 lower “price highs” and 3 lower “price lows”, with momentum gaining as we approach the US Session. The US Dollar has managed to break through support levels and is 30 PIPs away from reaching the next support level at 1.2552.

The currency pair is mainly being pulled down by economic figures on the mortgage and property market released in the UK this morning, as well as the increase in demand for the US Dollar, which can be seen across all major currency pairs.

The change in sentiment can also be seen in the US stock and bond market. US 2-year, 10-year, and 30-year bond yields have all increased throughout the day with the 10-year yield currently at the top. Stock futures, on the other hand, have declined pre-market open and are trading at a 1.02% decline. We can see here how the market has returned to a “risk off” scenario which can support the US Dollar as a safe haven currency.

GBPUSD - 31.05.2022 - 3.jpg

UK’s Economic Outlook

The statistics from the UK are already showing signs of decline against the backdrop of rising energy prices and an increase in the cost of living for consumers, which is confirmed by May’s business activity data. The service PMI fell from 58.9 to 51.8 which is extremely close to the stagnation and contraction zone.

This has resulted in commercial banks being reluctant to lend due to increased risk. This can be seen in the number of UK’s approved mortgages, which has dropped to 66,000 - the lowest since September 2020. Additionally, today the UK confirmed that the net lending to individuals has also declined to 5.5 billion, which is 1.5 billion lower than predicted.

Under these conditions, the continued increase in rates by the Bank of England does not look like a justified decision, but the bank is desperate to bring down inflation. Additionally, British prime minister Boris Johnson is coming under increasing pressure to abandon his post despite him not intending to retire yet. However, according to reports, his forced removal from office is a serious possibility. The political instability in the country adds additional anxiety to the traders.

US Dollar

The performance of the US Dollar is likely to depend on the economic releases scheduled for tomorrow, Thursday and Friday. In the meantime, the US economy is also carrying a level of risk from a sharp rate hike by the US Federal Reserve, although regulatory officials are reassuring investors that it can handle the pressure. Yesterday, the Fed spokesman, Christopher Waller, said that the 50 basis points rate hike might continue until inflation returns to the 2.0% target. At the same time, the overall level of rates may exceed the neutral indicator around 2.50–2.75%.

The spokesman also expressed confidence that the US economy will cope with the existing challenges, and that the tightening of monetary policy will not lead to a deterioration in the labor market or an increase in unemployment. Investors will be able to check these statements on Friday when May’s unemployment data will be published. In the meantime, the US Dollar continues to rise as we approach the next trading session.

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