The euro has hit the lows of 2020 and is not going to stop there. The British pound lost more than 160 pips against the US dollar yesterday, and there are no signs of a slowdown in the bear market even despite a strong oversold status that some indicators show. But before analyzing the technical picture, I would like to say a few words about a recent report from the UK. According to it, new trade barriers imposed in connection with Brexit led to a 6% increase in food prices in the UK, which further worsened the purchasing power of consumers. This is why the Russian military operation in Ukraine is the factor that affects the economic situation in the UK indirectly. Let me remind you that recently more and more British policymakers, just like in the US, are trying to accuse Russia of all their problems.
Inflation for food products that Britain tends to import from the European Union was more pronounced than for food imports coming from other countries, according to the London School of Economics' Centre for Economic Performance. The study covers a period of two years to the end of 2021, which partially excludes the impact of the pandemic. The figures highlight the economic woes caused by the UK's decision to withdraw from the EU's single market and customs union. This has led to an increase in the number of border checks of goods and a rise in shipping costs. The study said most of the rise in prices happened after the trade deal governing the UK's exit from the EU came into force in January 2021.
The report also said that food products were among the most exposed categories to new health checks and border delays, resulting in a drop in imports and higher prices. According to the latest data, annual consumer prices in the UK rose by 7% in March this year, the biggest jump in three decades. While much of this has been linked to energy prices, the observed shortage of natural gas will continue to increase the cost of electricity, especially after Russia demanded that imports should be paid in rubles. But as it turned out, food is also a major factor of inflation.
Recently, Bank of England Governor Andrew Bailey noted that everything that is happening in the world and the economy has already seriously affected the cost of living in the UK, which may soon lead the country into a recession. As I noted above, it turns out that galloping inflation is not only the result of the Russian special operation. Another reason behind it is the injection of billions of pounds into the economy which was completely paralyzed during the coronavirus pandemic.
Notably, the Bank of England has already raised interest rates three times since December, and a fourth increase to 1% is expected in May. However, this is clearly not enough to cap running inflation. While Brexit is not the main cause of soaring prices or the cost-of-living crisis, this report clearly shows that it has led to a substantial increase in food prices that will hit low-income families hardest. Given the recent rise in utility prices and heavier tax burden, the future of the GBP/USD pair seems gloomy. The market is still far from reaching the bottom.
GBP/USD technical outlook
Against this background, the pound continues to plunge and nothing could stop it so far. Bulls made an attempt to change the situation around the level of 1.2560, but there are still no conditions for hitting the bottom. Of course, the pair will rebound sooner or later, but we need to keep in mind that the medium-term bearish trend is only gaining momentum. I advise you to sell the pound each time there is a good upward correction. The nearest resistance levels are now located in the area of 1.26 and slightly higher, around 1.2640 and 1.2685. A breakout of 1.2560 will only intensify the downward movement. In this case, the price will head for new lows at 1.2525 and 1.2485. A more distant target in the current conditions will be the support level of 1.1.2440. The pair will quickly reach this point in case the state of the UK economy deteriorates.
EUR/USD technical outlook
The euro continues to test monthly lows and is now targeting the low of 2020. Expectations of monetary tightening by the European Central Bank do not help the euro in any way as everyone is waiting for the Fed's meeting in May. The US regulator may raise the rate by as much as 0.75% compared to the previous plan of a 0.5% hike. The aggravation of the geopolitical crises will continue to limit the upward potential of risk assets. Therefore, it is best to bet on the further strengthening of the US dollar. To ease the bearish pressure, buyers will need to defend the nearest support at 1.0630. If bulls fail to resist, sellers will most likely push the trading instrument to new lows at 1.0600 and 1.0560. A more distant target will be found in the support area of 1.0530. A correction on the euro will be possible only when bulls regain control over the resistance level of 1.0670. From there, the price may then rush towards 1.0700 and 1.0740.
