GBPUSD Fails at 1.16; Trend Remains Bearish
06 September 2022
Today's rally has been quickly erased as the GBP failed at the 1.16 resistance, dropping to daily lows near 1.1530 ahead of the US session.
Energy bailouts incoming
Earlier in the week, Liz Truss had won the Tory leadership contest to become the next UK prime minister, prompting no volatility in the GBPUSD pair.
Bloomberg reports that the new Prime Minister Truss has decided on a strategy to prevent the significant increase in energy costs scheduled to take effect at the beginning of next month under the current pricing regime. Over the following 18 months, the proposal may cost as much as 130 billion GBP.
The average household's energy costs were projected to increase by 80% from October to 3,548 GBP annually. According to Bloomberg, Truss' team's proposals would basically dismantle the current pricing structure and marginalize the energy regulator Ofgem. Ministers will instead decide on a new unit price that consumers would pay for gas and electricity.
"The sell-off in Gilts suggests international investors do not like either: i) the BoE's plans to start selling Gilts or ii) the new PM's, Liz Truss, likely plan to deliver large, unfunded government support." analysts at ING said in a note on Tuesday. As a result, they think that GBPUSD could decline to 1.10 in the coming months.
Bears remain in control
The daily chart seems to be forming a falling wedge pattern, a bullish reversal formation. In case the Pound jumps above the bearish trendline of the pattern, currently near 1.1650, we could see some significant bullish momentum, targeting the key resistance at 1.1760.
Till then, the outlook appears bearish, with rallies being sold. The next target for bears could be at 1.15, followed by this week's lows near 1.1450.