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GBP/USD price forecast after UK government policy reversal

By:
on Oct 3, 2022
Updated: Oct 8, 2022
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  • UK government backs down from the planned rate cut, and the pound rallies
  • GBP/USD forms a pennant on the 4h timeframe with a measured move beyond 1.18
  • US economic data should support the GBP/USD exchange rate, especially if it points to a softening labor mark

In a stunning turn of events, the UK government announced today a U-turn in its recent policy and backed down on 45p tax rate cut. After the Bank of England’s intervention last week to calm the bond market, the British pound rallied and consolidated for a while.

Today’s announcement led to another leg higher as the pound’s recovery from all-time lows against the US dollar continues. So where would the GBP/USD exchange rate go next, now that it has recovered almost all lost ground since the mini-budget’s announcement?

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GBP/USD on track to 1.18 and beyond

Today’s announcement further fueled GBP/USD’s rally. The exchange rate recovered from below 1.04 a week ago to close the previous week just shy of 1.12.

GBP/USD chart by TradingView

Despite the massive rally, there is still scope for more. The recent consolidation looks like a continuation pattern suggesting more upside.

More precisely, a pennant formation has the measured move pointing to 1.18 and beyond. Technical traders value the pattern due to the strong upside move once the consolidation ends.

Besides the news of the UK, the softening of US data also helps. Earlier today, news out of the United States showed that the manufacturing sector softened in September.

Moreover, the employment component shrank at a faster pace, suggesting that the labor market may ease. As such, traders increased their bets that the Fed would slow down its tightening cycle, and so the US dollar traded with a weak tone in response.

Summing up, the GBP/USD bullish case should be supported by both UK and US data. From the UK, the U-turn in the fiscal policy brings back confidence, which is beneficial to the pound. And, from the US, poor economic data should weigh on the US dollar as bets increase that the Fed will pivot soon.