The pound sterling (GBP) has been experiencing a downward spiral, with the GBP/USD pair moving sharply lower on Thursday. This sudden decline is a stark contrast to the earlier divergence between the UK's deteriorating political fundamentals and the resilient pound price action. The political turmoil in Britain, particularly the resignation of former health minister Wes Streeting and the speculation surrounding Andy Burnham's potential leadership challenge, has finally taken its toll on sterling. Burnham's influence and potential push for increased spending and taxation have raised concerns about the country's fiscal outlook and long-end gilts, causing a significant impact on the currency.
What makes this situation intriguing is that it coincides with a decent run of economic performance in the UK. The Citi economic surprise index, which tracks the performance of incoming data relative to expectations, has hit levels not seen since the second half of 2023. The UK economy expanded by 0.6% over the first quarter, with positive contributions from services, manufacturing, and construction. While seasonal distortions and front-loading tied to the Iran conflict may have influenced the figures, they suggest that the economy is holding up better than anticipated.
However, the political instability and concerns about fiscal credibility are overshadowing the positive economic data. The US economy, on the other hand, continues to showcase its exceptionalism. Despite the UK's higher Citi economic surprise score, the US data has consistently topped expectations for the better part of the past year, with the exception of a brief dip around Christmas. The latest retail sales report, import and export price data, and inflationary signals further emphasize the resilience of the US economy.
The dollar index (DXY) has also been on a breakout, breaking above downtrend resistance and reclaiming the 200DMA. This suggests that the dollar's slide may be over, with directional risks shifting sideways to higher. Traders are closely monitoring the 50DMA and 99.31 overhead levels, as a break above the latter could amplify the risk of a resurgent greenback. The GBP/USD pair has also experienced a significant decline, with the downside break risk from the rising wedge structure materializing on Thursday.
The technical outlook for GBP/USD is bearish, with the price cascading through the moving average zone and approaching the roundtrip back towards the wedge's initial formation level. The momentum picture is shifting in favor of the bears, with the RSI and MACD diverging from the signal line. The key zone to watch is the confluence of the 50 and 200-day moving averages, where rejections on bounces could provide an appealing entry level for shorts. If the price reclaims the moving average zone, the immediate levels overhead are 1.3450 and the 100-day moving average.
In conclusion, the political turmoil in Britain has finally impacted sterling, causing a sharp decline in the GBP/USD pair. While the UK economy has shown resilience, the political instability and concerns about fiscal credibility are overshadowing the positive data. The US economy's exceptionalism and the dollar's breakout further contribute to the downward pressure on sterling. The technical outlook for GBP/USD is bearish, with potential support levels and key zones to watch, making it a critical area for traders to monitor.
