The pound continues to lose ground. The pair updated its monthly low and has already tested the borders of the 21st figure. Yesterday's releases, which appeared in the green zone, showed a record decline in the UK economic activity. Almost all components were in the negative area, reflecting the consequences of the coronavirus crisis. The majority of figures published yesterday were for March, while the outbreak of the epidemic in Britain took place in April. This means that the next releases will be even worse and traders of the GBP/USD pair should prepare for new lows.
Last week the Bank of England announced that this year the United Kingdom could face the largest economic downturn in more than 300 years. Similar events were observed in the early 1700s, when the country was embraced by natural disasters and hostilities.
The first official reports indirectly confirm the assumptions of the regulator. The published figures are, of course, far from those recorded three hundred years ago. However, the tendency is alarming. Thus, in the first quarter, the UK GDP fell by 2% in quarterly terms and by 1.6% on a yearly basis. Even though experts expected much worse results (-2.6% q/q and -2.1% y/y), the economy contracted to its lowest levels for the past 11 years. The volume of business investments in the first quarter did not change compared to October-December and grew by 0.7% from the same period last year. Meanwhile, consumer spending collapsed by 1.7% compared to the previous quarter. Similar figures were recorded at the end of 2008. Industrial production showed much weaker results. In March, it fell by 4.2% on a monthly basis. This is the sharpest decline since January 1971.
The above mentioned figures speak for themselves. Nevertheless, Rishi Sunak, Chancellor of the Exchequer, expressed his opinion on the current situation yesterday. Consequently, the pound came under additional pressure. In his opinion, the UK will soon face a severe recession as a result of the economic consequences of the global coronavirus pandemic. Such a conclusion is obvious, given that a strict quarantine regime was introduced in the country only on March 24.
It should be noted that the British pound is weakening not only due to economic factors, but also political. The fact is that the Daily Telegraph published an interesting document yesterday - an economic analysis, which was compiled for the head of the British Treasury. According to the published data, even with the implementation of a relatively optimistic scenario, the crisis this year forms a 340-billion hole in the state budget - that is more than a third of the total budget. If a less optimistic scenario takes place - that is, the quarantine continues or the second wave of the epidemic occurs - the deficit in the fiscal year 2020-2021 may amount to more than half a trillion pounds. This is more than half of the state budget and about a quarter of Britain's annual GDP (we are talking about pre-crisis volume).
However, there was another piece of information that disturbed British politics. Johnson's opponents were outraged by the alleged measures to combat coronavirus. Thus, according to a published document, the Cabinet of Ministers will announce a tax increase in the coming weeks. In addition, the government intends to freeze the rise in salaries for state employees, as well as to cancel the automatic increase of pensions. Moreover, according to preliminary estimates, raising taxes and cutting costs will cover only a small part of the losses from the coronavirus crisis.
According to the British press, the right-wing conservatives are forced to raise taxes "to save the economy". They simply do not have any other choice. Nevertheless, the Laborites did not miss the opportunity to use the British government's unpopular intentions to their advantage. They accused Johnson and the Conservatives of poor management of the country amid protests from public sector employees.
In other words, the economic crisis is now aggravated by political battles. Moreover, all this is happening amid complex and unpromising negotiations between London and Brussels regarding the fate of the trade agreement. The combination of such negative fundamental factors puts pressure on the GBP/USD pair. As a result, the downward scenario is likely to occur.
From the point of view of technical analysis, the pair is currently testing the support level of 1.2200. This is the bottom line of the Bollinger Bands indicator. The price is below all the lines of the Ichimoku indicator, which formed a strong bearish Parade of Lines signal. This indicates a clear advantage of the downward movement. From current positions, it is preferable to consider sell deals to a two-month price low, which corresponds to 1.2130.
