GBP/USD is closer to 2016 flash crash levels than ever before. At the time of writing, the pair was down by -1.61% this week to trade at 1.1895. That’s not too far from its weekly low of 1.1876. Circumstances today, however, are very different than they were during the flash crash.
GBP/USD’s fall from its May 21, 2021 high of 1.4250 has been anything but accidental. The political chaos in Westminster this week is just the latest act in what has been a drawn-out tragedy for the UK economy in 2022. Fears of global recession haven’t helped the British pound either.
Economic contraction and record-high inflation are two factors the Bank of England will need to contend with at its next meeting on Aug 4. A weaker pound is unlikely to help either in the near term. But even if the Bank of England does raise interest rates at a faster pace of 50 bps, how does it compete with the Fed, which is hellbent on tightening interest aggressively even at the cost of higher unemployment? Traders should ask these questions as they size up GBP/USD.
Knowing the current context behind the GBP/USD’s latest fall, I do question whether it is sensible for big buyers to swoop in and buy up the British pound at levels south from here. The latest CFTC net speculative positions for GBP/USD show the market moving less bearish than before, but given that positioning didn’t look massively stretched prior, that may add the capacity for more shorts before the situation looks out of hand.
GBP/USD could very well rise in the coming days. Still, I am personally holding out from buying until there are decent signs of either a potential reversal or even a retracement before committing any capital. Even better if that price action is catalyzed by a big shift in the narrative around GBP/USD. Until then, I am trading this pair cautiously and without much conviction.