GBP/USD Forecast: Things look bad for the pound after dismal data

GBP/USD has slumped to its weakest level in two years below 1.2200.
Weaker than expected UK growth data weigh heavily on the pound.
The pair looks likely to continue to push lower amid risk aversion.

Eren Sengezer FXStreet

GBP/USD has dropped below 1.2200 for the first time since May 2020 on Thursday pressured by the dismal data releases from the UK and the broad-based dollar strength. Unless the pair reclaims 1.2200 and steadies above that level, it is likely to extend its slide in the short term.

The UK's Office for National Statistics reported on Thursday that the British economy grew by 0.8% on a quarterly basis in the first quarter. This print missed the market expectation of 1% and reminded investors of the Bank of England's (BOE) warning that there could be a recession in 2022, causing the pound to come under heavy selling pressure. Other data from the UK showed that Manufacturing Production and Industrial Production both contracted by 0.2% on a monthly basis in March.

Moreover, Brexit jitters put additional weight on the pound's shoulders. The European Union (EU) is reportedly ready to suspend the trade deal with the UK if the Northern Ireland Protocol is revoked unilaterally.

In the meantime, the negative shift witnessed in market sentiment allowed the greenback to find demand as a safe haven. Heightened inflation fears amid China's zero-COVID policy and the ongoing Russia-Ukraine crisis force market participants to seek refuge. At the time of press, the UK's FTSE 100 Index was losing 2.5% on the day US stock index futures were down between 0.5% and 0.8%.

In the second half of the day, April Producer Price Index (PPI) data from the US will be looked upon for fresh impetus. Unless risk flows return to markets, however, GBP/USD should find it difficult to stage a rebound regardless of the initial reaction to PPI figures. The US economic docket will also feature the weekly Initial Jobless Claims data, which is likely to highlight the tight labor market conditions once again.

GBP/USD Technical Analysis

GBP/USD returned below the descending trend line coming from May 5 after having recovered above it on Wednesday. Additionally, the last four four-hour candles closed below the 20-period SMA, highlighting the increasing bearish pressure.

In case the pair fails to reclaim 1.2200 (psychological level, descending trend line), additional losses toward 1.2150 (static level from May 2020) and 1.2100 (May 15, 2020, low, psychological level) could be witnessed.

On the other hand, 1.2250 (former support, static level from June 2020) and 1.2300 (psychological level, 20-period SMA) align as the next recovery targets if buyers manage to lift the pair above 1.2200.

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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