GBP/USD, GBP/AUD: British pound breaking down on multiple fronts

The British pound has looked healthier on the charts, closing below a key support zone on Thursday, signaling the potential for weakness to intensify ahead. And that’s before we even get to deteriorating fundamentals.

GBP/USD looks terrible on the charts

Technically, GBP/USD looks terrible. It’s broken key support at 1.2450 and the 200-day MA, closing at the lowest level since June. Given the significance of this zone, the case for further downside is strong, pointing to a likely test of 1.2300, the intersection of the 50% retracement of the 2021-2022 high-low and the lower bound of the downtrend it’s been stuck in sine July. Below that, there’s not a lot of support until you get to 1.1840, the 38.2% Fibonacci retracement of the 2021-2022 high-low. A stop above 1.2450 will help to limit losses should the break prove to be a head fake. RSI is approaching oversold levels, so that’s one indicator to keep an eye on.

Fundamentals add to GBP downside risks

Fundamentally, it’s easy to see why downside risks are growing for the pound. The US economy is looking more than resilient, destroying recession forecast after recession forecast, largely because of ongoing strength in the labour market.

Contrast that to what’s going on in Europe where stagflation risks look to be building. The ECB said it was done hiking rates on Thursday, pointing to the risk the Bank of England does the same next week given similarities in economic conditions to those seen on the continent. It’s like chalk and cheese. The US dollar is a beacon of light in an otherwise gloomy G10 FX forest.

GBP/AUD breaks uptrend in dramatic fashion

The buck is not the only currency GBP is looking vulnerable against. Take the Australian dollar, for example. It’s been the whipping boy of currency markets for months, used as a proxy to express pessimism towards what’s happening in China. But with sentiment and expectations towards China already so low, and with authorities already acting to stabilise economic activity, the directional risks for AUD are now arguably to the upside.

Look at the GBP/AUD daily chart. It’s broken out of the uptrend that began earlier this year when China reopening optimism started to wane. It’s also cut through the 50-day MA like a hot knife through butter, a level it’s respected numerous times in the recent past. Talk about potential downside risks!

Support located above 1.9150 is the first port of call on the downside. Beyond that, the Fib retracement at 1.9000 looms large.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.