GBP/USD potentially targeting long-term lows below key support

<p>The GBP/USD downward spiral has become increasingly steeper as the dollar continues to gain further traction on the back of last month’s US interest rate […]</p>

The GBP/USD downward spiral has become increasingly steeper as the dollar continues to gain further traction on the back of last month’s US interest rate hike, and the pound continues to founder on the Bank of England’s indeterminate monetary tightening timeline.

The past half year has seen a steady but substantial slide in the exchange rate as it became progressively clearer that the Fed would begin raising interest rates well before the Bank of England (BoE) would do the same. With the Fed having already begun hiking rates in December and the BoE still uncertain as to the timing of its own monetary tightening cycle, this difference could become even more pronounced, leading to further potential losses for GBP/USD.

The clearly-defined pattern of lower lows and lower highs since the 1.5900 area this past June has been well-documented, but this pattern has lately begun to accelerate with smaller pullback rallies interspersed among deeper drops. A case in point is the most recent pullback rally towards the end of December, when the currency pair bounced off the 1.4800 support level, only to rise in a comparatively modest fashion before resuming its sharp downward trajectory below 1.4800.

GBP/USD Daily Chart


In terms of relevant economic data releases potentially affecting the pound, a series of UK Purchasing Managers’ Index (PMI) surveys are out this week. The Manufacturing PMI showed slower-than-expected industry expansion while the Construction PMI showed better-than-expected expansion. The Services PMI is scheduled to be released on Wednesday. Substantially more important than these PMI surveys, however, will be the Monetary Policy Summary coming from the Bank of England on Thursday of next week. This should provide further clues as to how close (or not) the BoE may be to hiking interest rates.

On the US side, this week brings the FOMC meeting minutes of December’s Fed meeting on Wednesday, as well as the eagerly anticipated Non-Farm Payrolls and Unemployment reports on Friday.

Currently, GBP/USD has fallen sharply to closely approach major support around the key 1.4600 level, which is roughly where the currency pair bottomed out this past April. If this 1.4600 level is unable to hold as support, GBP/USD could further accelerate its downside momentum towards long-term, multi-year lows. On any sustained breakdown below 1.4600, the next major downside targets are at the 1.4500 level followed by the key 1.4250 support area.

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