British Pound Forecast: GBP/USD at Risk of Further Losses as the UK Economy Weakens

There was considerable risk-off sentiment and bad UK economic data pushing the British Pound down substantially in its final day of the week against the U.S. dollar on Friday. A 1.44 percent daily decline to 1.2840 and a 1.68 percent five-session decline brought GBP/USD to its lowest level since September 2020 during the New York afternoon market hours.

Various UK reports on Friday morning, including retail sales, manufacturing output and services sector activity for March, surprised on the downside, a sign that the recovery is faltering and that the economy is starting the second quarter on a weaker footing as surging price pressures curtail demand.

The Bank of England (BoE) may not be as forceful in its fight against inflation as other central banks given the fast slowdown in GDP. This indicates that we may only witness moderate interest rate rises in the coming months, rather than front-loaded hikes such as those entertained by the Federal Reserve, which is now seen boosting borrowing costs by 50 bps at its meetings in May, June and maybe July.

Since March, the U.S. 2-year yield has risen 128 basis points to 2.72 percent as a result of the Fed's hawkish repricing of policy. At 66 basis points higher to 1.70 percent during the same time period the 2-year gilt has also moved higher, but its rise has been more limited and has increased the US-UK interest rate differential.

Looking ahead, there is little reason to be enthusiastic about sterling. The possibility that the UK economy would contract in the second quarter and that the BoE's normalization cycle will fall short of forecasts may keep the GBP/USD exchange rate stable or force the next leg lower in the exchange rate's downward trajectory.

Another aspect that may damage the British pound in the near future and other high-beta currencies for that matter is declining sentiment. Stocks have fallen across the board in recent days, increasing market volatility. If volatility levels soar more and equities extend their sell-off, demand for safe haven assets are anticipated to increase, strengthening king U.S. dollar.

GBP/USD Technical Analysis

For the GBP/USD, the creation of a descending triangle pattern on the daily chart could portend greater losses according to my technical analysis article published on Wednesday. Since then, the bearish formation has been validated after the pair dropped below support at 1.3000/1.2980, an occurrence that has rekindled selling interest. However, the recent changes have brought the GBP/USD currency pair closer to a critical support level near 1.2830, which is defined by the 50% Fibonacci retracement of the March 2020 low/June 2021 rise. An intraday dip below this level might reinforce the current sell-off and pave the way for a retreat towards 1.2670, the measured goal of this triangle breakout, for traders to keep an eye on in the coming days.

Initial resistance for a bounce is at 1.2980/1.300, but if buyers manage to clear this obstacle firmly, we cannot rule out a rise towards 1.3055, followed by 1.3200. The bears appear to be completely in control of the market at the moment, making a bullish situation seem implausible.