The pound is going through tough times. GBP/USD has reached the 1.24 handle, falling to a fresh three-month price low. The GBP/USD pair is actively declining amid a stronger US Dollar Index, which tested the 105 level on Thursday. However, the downtrend is not solely due to the greenback's strength but also the pound's weakness. Recent events in the House of Commons of the British Parliament only exerted pressure on the pair, further extending the downtrend.
In general, September has not been favorable for the bulls, at least not the first week. On August 31st, the pair reached a local peak at 1.2733, afterwards it reversed and has been gradually declining since then. The soft comments from the Bank of England governor contributed to the fundamental picture, accelerating the price decline.
Recent events should be viewed through the lens of earlier fundamental developments. Several economic reports have reflected negative trends in the UK economy, thereby reducing the likelihood of more rate hikes. For example, UK retail sales volumes (including fuel costs) have declined by 1.2% in July 2023, against expectations of a 0.6% fall.
This is the worst result since March. Retail sales fell 3.2% annually in July, compared to an expected decline of 2.1%. Core retail sales (excluding fuel costs) also fell into the "red zone": on a monthly basis, the indicator dropped to -1.4%, and on an annual basis, it reached -3.4% (the worst result since March).
Even before this batch of data, bulls have been displeased with other economic reports in the UK. In particular, the country's unemployment rate increased again to 4.2%. Although the increase isn't big, the UK has still recorded a rise for the second consecutive month. The number of claims for unemployment benefits increased by almost 30,000 - the worst result since January 2021.
Inflation data was not on the pound's side as well. The Consumer Price Index decreased to -0.4% in monthly terms, falling into negative territory for the first time since January. The Retail Price Index decreased to -0.6%, compared to an expected decline of 0.7%. This indicator fell into negative territory for the first time since January 2021.
Such results weakened hawkish expectations regarding the Bank of England's future course of actions. Nevertheless, some experts are still betting on another round of rate hikes in one of the upcoming meetings as inflation remains at a relatively high level despite the downtrend in key indicators. Illusory hopes persist, but BoE Governor Andrew Bailey put an end to them on Wednesday, at least in the context of the near-term outlook.
Speaking before the UK Treasury Committee, he stated that "many economic indicators were signalling that the fall in inflation will continue." Moreover, he added that many indicators are pointing to a fall in inflation. In this context, he stated that the central bank was reaching the 'top of the cycle' on rates. Bailey's colleague, Swati Dhingra, complemented his speech by saying that rates are already high.
It's also worth noting that during his speech, Bailey raised the question of whether inflation expectations would continue to decline as inflation slows down. A new report by the British central bank can be seen as a kind of response to this question. According to the conducted survey, British businesses expect a sharp decline in inflation according to the Consumer Price Index - to 4.8% on an annual basis (compared to the 5.4% predicted in July).
As we can see, the downtrend in GBP/USD is not only due to the broad strength of the US dollar but also the pound's weakness. Bailey adopted a cautious stance and voiced rhetoric of a "concluding" nature. While he only added to the existing fundamental picture for GBP/USD, his speech still exerted downward pressure on the pound.
From a technical perspective, on the daily chart, the pair is trading between the middle and lower Bollinger Bands, indicating a bearish bias. The Ichimoku indicator has formed a bearish "Parade of Lines" signal, reinforcing the bearish sentiment. The nearest significant support level is at the lower Bollinger Bands line on the daily chart, which is at the 1.2450 mark. Breaking this level would open the path to the next price barrier at 1.2320 (the lower Bollinger Bands line on the weekly chart).