The GBP/USD exchange rate plunged on Wednesday after the relatively weak UK GDP data. Sterling is now hovering near its lowest level since June this year. It was trading at 1.2442, which was ~5.30% below the highest level in July.

The UK economy contracted again in July as the impacts of warm weather continued. Economic numbers by the Office of National Statistics (ONS) showed that the economy contracted by 0.5%, a bigger decline than the median estimate of -0.2%.

This contraction translated to a year-on-year growth of 0.0%, also lower than the estimated 0.4%. Additional data revealed that the country’s industrial production dropped by 0.7% in July, a steeper drop than the expected 0.6%. 

Construction output also declined during the month, signaling that the country’s economy is struggling. Worsening the situation is the fact that wage growth is continuing, meaning that inflation will likely remain elevated for a while. The average wage index rose by 8.4% in July.

The challenge for the Bank of England (BoE) is that fighting inflation during a stagflation period will not be easy. More tightening will likely drag the economy while status quo will lead to entrenched inflation. Most analysts expect that the bank will be inclined to pause rates in September.

The next important GBP/USD news will be the upcoming US inflation data. Economists expect the data to show that inflation ticked up for the second month in August. Precisely, they believe that the headline consumer price index (CPI) rose by 3.4% YoY while core inflation eased from 4.7% to 4.3%.

The other important GBP/USD data to watch will be the latest US retail sales numbers. These numbers will likely show that the country’s retail sales continued rising in August even as inflation rose.

The GBP/USD exchange rate has been in a strong bearish trend in the past few months. It has formed a descending channel and remained below the 25-day and 50-day moving averages. The price has moved below the important resistance level at 1.2550, the highest point on September 11th. It also fell below the 23.6% retracement level.

The outlook for the pair is bearish, with the next target being at 1.2300. This view is also being supported by the rising Brent crude oil price, which jumped to $92.4.

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