British pound attempts to recover from record lows

The British pound extended sell-off on Monday morning. On Friday GBPUSD pair fell more than 3% and this morning price plunged by another 4% ! Even though most of this move has already been erased, GPBUSD has reached historical lows! Where does such a huge sell-off of the British currency come from? We provided more details regarding this topic before the weekend, therefore now we will only present key points: 

• Decline pace of interest rate increases by the BoE (caused by enormous uncertainty regarding further inflation path)
• Huge fiscal uncertainty (which could further boost inflation)

The ruling prime minister, Liz Truss, revealed the details of the so-called mini-budget. It aims to boost the UK economy's long-term growth potential and includes massive tax cuts:

• Lowering the basic income tax rate from 20% to 19%.
• Lowering the higher income tax rate from 45% to 40%
• In addition, the corporate tax increase to 25%, which was due to come into force next year, has been suspended for the time being. Corporate tax will remain unchanged at 19%.

It might seem that the announcement should be positive, but given the current market environment, investors are concerned how these tax cuts will be financed? In the face of such high economic uncertainty, the new government will have huge problems financing the deficit, which led to weakness of GBP.

Traders should expect more volatility during today's session as the Bank of England plans to make a statement in the afternoon.

Bond yields jumped dynamically higher. Source: Bloomberg.

Technical outlook

Technical analysis is also not very favorable for the pound. Looking at the GBPUSD chart on the W1 interval, the new week started with a massive sell-off. However, despite the strong slump, the price is trying to rebound, which means that a significant bottom shadow can be seen on the currently forming weekly candle, which may lead to an upward correction. However, there is still a lot of time until the end of the week, so only on Friday one will be able to try to assess the current shape of the candle. At the moment, technical analysis indicates the possibility of continuing the movement within the downtrend. If current sentiment prevails, the psychological level of 1.0000 or 0.9650 may become targets for bears, where the 161.8% Fibonacci external retracement of the last upward correction is located. In turn, only a break above 1.0935, i.e. the upper limit of the 1:1 system, could change the balance of forces and indicate some bullish momentum in the short term.

GBPUSD interval W1. Source: xStation5

Looking at the chart in the shorter time horizon - the H1 interval, one can observe a very strong acceleration of the downward trend. We pointed to such a scenario in our recent analyzes in which we mentioned breaking below the lower limit of the 1:1 structure, and  the 100 EMA - blue line, which indicated the possibility of massive collapse. Regarding the near future, while an upward correction may occur at any moment, however the main trend remains downward and it is possible that new lows will be set, so caution is advised. Currently, the 1.0885 level may prove to be the key short-term resistance, as it is marked with the 38.2% Fibonacci retracement of the last downward wave.

GBPUSD H1. Source: xStation5