GBP/USD Ends the Week on the Back Foot

GBP/USD closed lower for the sixth consecutive day on Friday, hovering perilously close to its weakest levels since the pandemic flash crash of March 2020. August marked the worst month for the British pound since Brexit, with sterling falling by 4.5% against the dollar. After seeing the euro fall to parity with the dollar in July, murmers of the pound doing the same are growing louder.

As the daily chart above shows, 2022 has not been pretty for the pound. After a brief rally to 1.3727 in mid-January, the UK currency has been in a steady downtrend, now contained by a well defined price channel.

GBP/USD has been pressured lower by a combination of fears about UK economy and a stronger dollar, boosted by Fed rate hikes. According to Bloomberg, India has become the world’s fifth-largest economy in ‘nominal’ cash terms, after it surpassed the United Kingdom in March 2022.

GBP/USD Monthly Chart

In a widely cited research note published last week, Capital Economics’ Chief U.K. Economist Paul Dales said he expects GBP/USD could fall as low as $1.05 by mid-2023 as the energy crisis pushes the euro-zone and UK economies into recession. This would mark the lowest level in GBP/USD since the 1985 Plaza Accord.

Britain’s new Prime Minister will be announced in Westminster at 12.30pm on Monday. Frontrunner Liz Truss has indicated that she could consider curbing the Bank of England’s independent decision-making on interest rates. Analysts expect volatility in the coming days and many view a Truss victory as potentially bearish for the pound.