GBP/USD 3-week rally pauses as OBR warns on recession risks

The GBP/USD rally paused today after the Office of Budget Responsibility (OBR) warned of the current lockdown. The office said that the economy would shrink by 35 per cent if the lockdown remained for three months.

It also said that the country’s borrowing would increase by between £218 billion and £273 billion in the next financial year. The organisation attributed the downgrade to lower tax collections and increased government spending during the lock down.

UK not ready to reopen

The UK economy has been affected significantly by the current coronavirus pandemic. According to Worldometer, the UK has confirmed more than 88k infections and more than 11k deaths. This makes it one of the most affected countries in the world.

The situation will get worse according to Jeremy Farrar, who heads the Wellcome Trust. In a statement on Sunday, he said that the UK would be the worst-affected countries in Europe. This is partly because the government was late in issuing a national lockdown.

Dominic Raab, who is representing Boris Johnson, had the same sentiment. In a statement, he said that the “worst was yet to come” as he projected more infections and more deaths.

He also ruled out easing the current restrictions soon. He said that the current restrictions would continue for three more weeks:

“We don’t expect to make any changes to the measures currently in place at that point and we won’t until we’re confident, as confident as we realistically can be, that any such changes can be safely made.”

The report came a few minutes after another one by the IMF predicted that the global economy would slide by 3% this year.

UK economy hurt by coronavirus pandemic

Today’s report by the OBR came at a time when data from the UK has been disappointing. Last week, data from Markit and the Chartered Institute of Purchasing and Supply (CIPS) showed that the services PMI dropped to a record low of 34.5. The manufacturing PMI dropped to 47.8.

At the same time, several retailers such as Debenhams and BrightHouse have already filed for bankruptcy. Analysts expect the number of bankruptcies in the UK to rise.

The unemployment rate is increasing as more companies remain shut. In a recent report, David Blanchflower said that the unemployment rate in the UK would rise to 21 per cent if the current lockdown remains. This means that more than 6 million people would be out of work. In another report, David Bell, an economist, warned that unemployment would be ten times worse than during the last financial crisis.

According to the Institute for Employment Studies (IES), the UK economy has already lost 2.5 million jobs. The challenge for the UK economy is that the rising unemployment rate would spread to the financial services sector. This would lead to a second financial crisis.

GBP/USD technical outlook

The GBP/USD pair rally stalled today after the dire reports on the state of the economy. The pair, which has been on an upward trend since March 20 fell by a few pips. On the four-hour chart, the pair has already crossed the 61.8 per cent Fibonacci Retracement. The price is above the 50-day and 25-day exponential moving averages while the momentum indicator has started to ease. The pair may continue rising and possibly test the 78.6% retracement level of 1.2831. Alternatively, the pair may retest the 50% retracement level at 1.2315.