Is the GBP on the edge of a cliff?

inspirante Updated   
As the British Pound approaches a major support level of 1.4000, we think it is akin to peering over the edge of a cliff.

With one of the worst headline inflation rates in the developed markets, crippling energy bills, and a newly elected government, the Bank of England (BOE) is in a place few would want to be in. As the next policy meeting date nears, the central bank is likely to raise rates. But by how much?

Too little, and inflation will remain a key issue weighing on the currency’s attractiveness compared to the USD. Too much, and consumers will be crushed with the already astronomical energy bills and rising loan re-payment, likely pushing the UK further into stagflation, something that central banks try to avoid.

Either way, pound traders are likely to be disappointed. And we have not even begun to mention the effects the energy bill cap might have on longer-run inflation.

The technical setup proves more interesting as the current price lies right on the 1.4000 level, a major support level, only ever breached once in 1984 and retested once in 2020. We think a clear break of this will likely lead the pound to fall harder as traders ride the downward momentum.

On a shorter timeframe, the pair is arguably trading in a descending channel. As current prices teeter on the lower channel band, a breakout at the downside could spell trouble, sending the pair lower.

There seems to be little in the way to slow the move lower for the GBPUSD pair as both macro headwinds and technical ones beat down the Pound lower against the USD. With the US Federal Reserve meeting on the 21st and Bank of England meeting on the 22nd of September, we expect higher volatility over the next few days, a snap lower could drive momentum traders to further extend the downside move.

Entry at 1.1450, stop at 1.17400. Target at 1.08000 and 1.06150.

The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs

The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios.
Note: We mean to say support level of 1.14000 instead of 1.4000 in the first paragraph.

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