Extremely Oversold Ahead of FOMC

The pair will likely have a relief rally ahead of the Fed decision and then resume the bearish trend ahead of the BOE.

Bearish View

• Sell the GBP/USD pair and set a take-profit at 1.1850.
• Add a stop-loss at 1.2050.
• Timeline: 1 day.

Bullish View

• Set a buy-stop at 1.1980 and a take-profit at 1.2050.
• Add a stop-loss at 1.1900.

The GBP/USD price continued its remarkable sell-off as UK stagflation risks continued. The pair slumped to 1.1950, which was the lowest level since March 2020. It is on track to drop for the third consecutive week. Also, sterling has dropped by over 16% from its highest point in May 2021.

UK Stagflation Concerns

The UK is going through a period of stagflation where slow economic growth has converged with a period of high inflation.

Data published on Monday revealed that the country’s economy contracted for the second straight month in April. The numbers also showed that key sectors of the economy like construction, industrial, and manufacturing output also declined in April.

And on Tuesday, data by the Office of National Statistics revealed that the labor market is also experiencing jitters as inflation soars. The unemployment rate rose unexpectedly while wage growth rose at a slower pace than expected. These numbers imply that inflation is rising at a faster pace than wages.

Therefore, the GBP/USD pair is crashing as investors anticipate divergence between the Federal Reserve and the Bank of England.

On the one hand, the Fed is expected to continue tightening at a more aggressive pace, with some analysts expecting a 0.75% increase. The bank is also expected to point towards more hikes later this year.

On the other hand, analysts expect that the Bank of England will hesitate when it meets on Wednesday. This means that the bank will deliver a relatively bearish rate hike. The concern among the BOE is that more rate hikes in a period of stagflation will hurt the economy.

The GBP/USD pair will react mildly to the latest US retail sales numbers that will come out during the American session. These numbers are expected to show that the country’s retail sales declined in May.

GBP/USD Forecast

The three-hour chart shows that the GBP/USD pair has been in a strong bearish trend in the past few days. Its attempt to rebound on Tuesday failed when it moved to 1.2200. The pair managed to move below the important support at 1.2163, which was the lowest level on May 13th. It also dropped below 1200.

It has moved below the 25-day and 50-day moving averages and is along the lower side of the Bollinger Bands. Therefore, the pair will likely have a relief rally ahead of the Fed decision and then resume the bearish trend ahead of the BOE. The key level to watch will be at 1.1900.