GBP/USD forecast as the UK enters an era of stagflation

The GBP/USD continued its meltdown after the relatively weak UK GDP data and the rising worries of a recession. The pair crashed to a low of 1.2267, which was the lowest level since May 16th. It has fallen by more than 9% year-to-date.

UK GDP data

The UK economy is staring at both a recession and stagflation. Economic data published by the Office of National Statistics (ONS) showed that the economy contracted for the second straight month as inflation continued rising. 

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The UK economy contracted by 0.3% in April after falling by 0.1% in the previous month. This contraction was worse than the median estimate of a 0.1% increase. On a year-on-year basis, the country’s economy expanded by 3.4%, lower than the previous 6.4%. 

Other numbers published by the ONS showed that the country’s manufacturing production declined by 1.0% while industrial production fell by 0.6%. On a year-on-year basis, the two productions rose by just 0.5% and 0.6%. 

At the same period, the UK construction production declined by 0.4% in April after rising by 1.7% in the previous month.

These numbers mean that the UK is now staring at stagflation, a period when high inflation is accompanied by low economic growth. In most periods, stagflation usually leads to a recession.

Therefore, the GBP/USD pair is falling because of the difficult place that the Bank of England finds itself in. Inflation remains high even after implementing four rate hikes. It is expected to hike interest rates by 0.25% this week.

It is also falling as investors anticipate a more hawkish Federal Reserve. The Fed is expected to continue hiking interest rates after last week’s strong US inflation data. 

GBP/USD forecast

The daily chart shows that the GBP/USD pair has been in a strong bearish trend in the past few months. A closer look shows that it has crashed in the past four straight days and is approaching its lowest level this year.

The pair has dropped below the 25-day and 50-day moving averages while the MACD has moved below the neutral level. 

Therefore, the path of the least resistance for the pair is bearish, with the next key support level being at 1.2162. A move above the resistance at 1.2400 will invalidate the bearish view.