Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2900.
- Add a stop-loss at 1.3140.
- Timeline: 1-2 days.
Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.3140.
- Add a stop-loss at 1.2900.
The GBP/USD exchange rate tumbled to the lowest level since April after Rachel Reeves hinted that there will be tax increases in her upcoming budget. It also tumbled as traders waited for the upcoming Bank of England (BoE) interest rates decision.
UK Tax Increases and BoE Rates Decision
The GBP/USD exchange rate plunged after Rachel Reeves delivered her pre-budget speech in parliament. In it, the Chancellor of the Exchequer hinted that there will be tax increases for the wealthy.
Tax increases will come at a time when some wealthy people have changed their countries to avoid paying them. Most notably, they will come at a time when UK residents are suffering from high inflation, which jumped to 3.8% in September.
There is also a risk that the current stagflation in the UK will continue for a while. Stagflation is a period where a country's economic growth stalls in a high-inflation environment.
It is against this backdrop that the Bank of England (BoE) will deliver its interest rate decision later today. Economists expect that most of its members will vote to maintain interest rates at the current level. Cutting rates in a high inflation period will stimulate more price increases.
The BoE decision comes a day after the US published strong economic numbers. Data by ADP showed that the private sector created 42,000 jobs after losing 32,000 in September.
More data showed that output in the services sector improved in the US. The ISM non-manufacturing PMI figure rose to 52.4 in October from the previous 50, while another one by S&P Global revealed that the figure rose to 54. A PMI reading of 50 and above is a sign a sector is growing.
GBP/USD Technical Analysis
The daily timeframe chart shows that the GBP/USD exchange rate has crashed in the past few months, moving from a high of 1.3725 in September to a low of 1.3012 this week.
It has moved below the important support level at 1.3140, its lowest level on August 1, the neckline of the double-top pattern at 1.3724. A double-top is one of the most bearish patterns in technical analysis.
The pair has moved below the 38.2% Fibonacci Retracement level at 1.3140. Also, it has moved below the 50-day and 200-day Exponential Moving Averages.
Therefore, the most likely GBP/USD forecast is bearish, with the next key target being at the 50% retracement level at 1.2940. The alternative is where it rebounds and retests the key resistance level at 1.3141.
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