GBP/USD forecast and signal: “sterling could fall apart”

The GBP/USD exchange rate has pulled back this week and the worst is yet to happen for the sterling, according to Amundi, the biggest hedge fund in Europe. The pair, which peaked at 1.2785 on December 14th, has pulled back to about 1.2600.

Amundi shorts sterling

The GBP/USD exchange rate could continue crashing if analysts at Amundi are correct. They believe that it could crash by more than 4% in the coming months as the Bank of England (BoE) moves to cut interest rates.

This view has been reinforced by the recent economic data from the UK. A report published earlier this month showed that wage growth fizzled in November. A separate one showed that the British economy is no longer growing.

And on Wednesday, data by the Office of National Statistics (ONS) revealed that the country’s inflation continued falling in November. The headline Consumer Price Index (CPI) tumbled by 0.2% while the core CPI fell by 0.3%. 

This decline translated to a year-on-year decline of 3.9% and 5.1%, respectively. While these numbers are still higher than the BoE’s target of 2.0%, they mean that they are moving in the right direction.

Therefore, Amundi believes that the BoE has a bigger incentive to slash rates at a faster pace than the Federal Reserve. In fact, some analysts are questioning whether the Fed should slash interest rates since the economy is doing modestly well.

Economic numbers scheduled for later on Thursday are expected to show that the economy expanded by over 5% in Q3. Another leading report by the Atlanta Fed shows that the economy expanded by about 2% in Q4.

The UK, on the other hand, is in a difficult position and is nearing a recession. Retail sales numbers expected on Friday will likely confirm this. Economists polled by Reuters expect the data to show that the country’s retail sales tumbled by 1.8% YoY in November. GDP figures are expected to show that the economy barely grew in Q3.

Therefore, with inflation falling to the 2% target and the economy on the verge of a recession, Amundi anticipates a 125 basis point rate cut by the BoE in the coming months. In a note, a key analyst at the fund says:

GBP/USD technical analysis

GBP/USD chart by TradingView

Turning to the daily chart, we see that the GBP/USD pair has been in a recovery path in the past few weeks. In this period, the pair has remained above the 50-day and 25-day Exponential Moving Averages (EMA).

Most importantly, it has formed a rising wedge pattern that is shown in green. It has also formed a small double-top pattern. Therefore, the outlook for the pair is bearish, with the next point to watch being at 1.2500.